For each of us there are moments in life when money is needed, but it is impossible to postpone a purchase or to save up. These may be expenses for purchasing a car, home renovation, wedding, holiday, education loan or a need appears of having an instant access to funds for making small transactions. Australian banks, like ANZ, NAB, Citibank, Commonwealth, Westpac, St. George and others, have a lot of personal loans proposals for such cases, including: secured and unsecured term loans, credit lines, overdrafts and credit cards with fixed or variable interest rates. It is rather difficult to choose among them the loan product which will fit you best. Even harder it is to check and to compare all price and non-price parameters of a credit proposal. How to do it and how to improve your chances of getting a personal loan, even if you have a bad credit score? Bankchart.com.au helps you to make the right steps.
Step one. What is a personal loan? What types of such loans are provided in Australia?
A personal loan is a credit limit or an amount of money, borrowed for consumer purposes (car purchase, wedding, reconstruction, education, etc.) from a bank or another financial organization and is paid back in fixed periodic payments or in other way (for overdrafts, credit lines). The terms of the loan usually range from one to ten years. Often personal loans are unsecured, but sometimes they can require collateral, like a car or a mortgage. The interest rates on private credits, as a rule, are the highest on the market - according to our investigation their level can reach 19,99%, but on secured loans it is lower.
There are many types of personal loans depending on the segmentation criterion. So, depending on a customer’s consumer goal, the credits can be:
For purchasing a car – can be provided in the form of a target loan secured by a car, or an unsecured loan for any goals. As a rule, a new or used automobile can be purchased from an official dealer or a private party. Because there are other financial forms of getting an automobile credit, like leasing and trade-in – we describe this loan details in a separate article.
Home renovation – can be rather expensive, so a loan financing may be required. The credit can be secured or unsecured, with a fixed or variable interest rate. The maximum term of the house renovation loan on the market is 10 years.
Wedding loan – the most important day in our life usually is not cheap: the expenses for the ceremony, rings, food and drinks, a perfect dress for the bride and a honeymoon holiday – raise the budget to a great amount. So, an unsecured loan in the form of a term loan or a line of credit may help you to finance this event.
Holiday loan – there are situations, when you just need to change your place of living. It can be a business trip, an overseas holiday or just a week-end on Christmas. Even if you have enough cash to pay for tickets, a bank credit may be useful, especially if we speak about credit cards with travel rewards.
Debt consolidation or refinancing credit – is a new loan, taken to redeem all previous credits (personal, on credit cards) at once. Usually it is used to simplify the repayment process or to decrease the interest expenditures because of a lower rate on the new loan.
Education loan in Australia – is a type of a personal loan, provided for students to assist them to pay for post-secondary education and connected expenses, like books and stationery, tickets and living costs. In this case a special loan product from a bank can be offered, or a HECS-HELP scheme may be used. A tax deduction in such a case occurs, which equals the sum of the interest paid on a student loan during a tax year, but no more 2 500 AUD. This amount also can be reduced for high income persons.
For small sum consumer loans – if you want to have a permanent access to a credit limit to be used to pay for goods and services at any time if you require – a credit card will suit you best of all.
The loans provided for other than consumer purposes are not personal. Such credits are home loans, business loans and also investment ones.
Depending on the availability of collateral for a loan, the credits can be:
Secured – is a credit, provided by a financial organization against a pledge of some assets, like a car or a mortgage. This type of loans has the lowest level of interest rates among personal ones (from 5,19% per year according to our investigation) and the highest loan terms (till 10 years). But, you have to remember that if you have difficulties with repayment of the debts - your bank will take the collateral.
Unsecured personal loan – if you do not want to pledge collateral, you may prefer this type of loans. It requires minimum documents to provide to a bank and it is given for any consumer purposes. But, unlike secured ones, such a credit has the highest rate in Australia, relatively short credit terms and a small maximum sum.
Depending on the form of a credit providing, the personal loans can be:
Term loan – is a credit from a bank or a credit union, provided for a specified amount, which is repaid according to a fixed redemption schedule. Compared to the other loans, this form usually has lower interest rates and it is provided for longer periods, above 1 year. But, personal term loans also have disadvantages, like: they are provided only for one purchase, a fixed monthly repayment must be made, and the interest rates are charged at once on the whole sum, whereas on a credit line you can use the money by tranches.
Line of credit definition – is a loan limit, set by a financial organization for a customer, enabling him to take money at any convenient time within the credit line amount. Usually, it is unsecured and can be used for all consumer goals. It may require only the charged interest monthly repayment, but the rates often are rather high.
Overdraft account is similar to lines of credit, but usually it is provided for a lower period of time. For example, a full monthly redemption of the liabilities can be required. As a rule, it is set on a transaction or a savings account. When you use the loan facility, an overdraft fee may be charged, but when the account is in plus – no additional fee will occur. Credit lines and overdrafts for personal loans are often provided in the form of a credit card.
Credit card - is a payment card, enabling its owner to use a credit limit, established on the card, to purchase goods and services. It is simply to get this credit product, but, as a rule, the cards have the highest interest rate among personal loans. At the same time, Australian banks can provide interest free days, instant approval and different rewards and other perks for card owners.
There are such kinds of personal loans according to the interest rates types:
Fixed rate loans – in such a situation the percentage rate will be constant during the whole credit period. It is used, when a person wants to set the level of his loan periodic repayments or expects that the interest rates will grow in the future.
When you choose a variable rate loan, the interest rate often follows the changes of the Reserve Bank of Australia cash rate. But, also it can depend on other market fluctuations. So, you will save on interest payments when the financial market prospers, but suffer when it fails. Do not despair if the rate goes up - you always can refinance your personal loan.
Also, variable rate loans usually have fewer restrictions regarding early repayment conditions, for example, you may make extra redemptions at any time without fines.
Step two. Do you really need a personal loan? What types of the credits will fit you?
First of all, before applying for a personal loan, you should ask yourself, whether you can allow to postpone a purchase for some period of time and to save the necessary sum of money on a savings plan or a term deposit. This is especially true, if you need only several months to save up for a new iPhone or a laptop. In such a case you not only gain some interest revenues and save money on banks commissions, but also will train to make personal budget and to control your expenses, what will save you much more money during the whole life. But, if you are not able to save up or don’t what to wait, you may apply for a loan.
Even so, if you decide to get a personal loan, you must calculate how much you need, and what monthly repayments you can afford. How long will you require repaying the debt and how often will you desire to do it? Australian banks provide personal loan till 10 years and offer weekly, fortnightly or monthly frequency of repayments. Do you need a loan with fixed or variable interest rates? What type of a personal loan to choose? Our loan calculator will help you to make computations, also you can use the banks’ ones on their sites.
Answering the following questions will help you to choose the right type of a personal loan:
- What sum of money do you need? If the required sum is less, than 3 000 AUD – a bank credit card will fit you best of all. There are only a few personal loan proposals on the market for such a small financing. If you redeem the credit card during the grace period - it will be not only the most affordable decision, but also the cheapest one - you will not have to pay no interest rates.
- Do you have collateral to be pledged as a security? If you have this opportunity, you can take the following benefits of the secured lending: low interest rates, longer loan terms and larger maximum sums.
- Are you going to purchase a car? If your goal is a vehicle – in such a case you can use one of the following loan forms: automobile loan from a dealer or an individual, trade in or leasing.
- If you have no credit history or a low score – in such a case your credit options will be limited, and the applications for more types of loans will be rejected. So, only a small unsecured credit in the form of term loans, overdrafts or lines should be applied for.
- Do you want to have a constant access to credit funds for small purchases at any time and place? In such a case a financing in the form of overdrafts or credit lines on a credit card will suit you most.
Step three. How to compare personal loans?
Before applying for a personal loan it is important to evaluate all price and non-price parameters of the credit, such as:
- The level of interest rates: according to our research it can range from 5,19% to 19,99% annually. The rates size depends not only on the banks proposals, but also the type of the loan. The more flexibility a bank proposes, the higher rates will be. Thus, secured term credits have the smallest percentages rates on the market. On the contrary, the banks in Australia charge the largest rates on unsecured overdrafts and credit lines. Fixed rates, as a rule, are lower, than variable ones, but the last proposals usually provide the borrower more possibilities of the debt redemption (at any time with no fee).
- The size of banks commissions:
- One-time fee – in accordance with our research varies from 0 to 495 AUD and may consist of two and more commissions, for example, establishment fee and for security documentation. Also the tariff can be set in the form of a fixed sum or a rate, so, in the last case the larger the credit sum is the greater the fee will be.
- Periodic commission – can be established on a monthly or yearly basis and varies from 0 to 60 AUD. It is used by the banks more rarely comparing to the one-time one.
- Early exit fee – can range from 0 to 300 AUD and usually is used, when you redeem ahead time the fixed rate loan, and it can be missed on variable rate credits.
- Missed payment commission. You must always make the periodic repayments in time in order not to be fined – the penalty can reach 25 AUD. Set an automatic repayment from your transactional or savings account and you will never get penalties.
- Redraw fee. If your term loan has the redraw facility, the bank can charge a commission in the amount of 10-50 AUD.
- Insurance tariff – secured personal loans may require insurance cover, which may be rather expensive. Sometimes insurance fee can be set up and for unsecured loans, for example, insurance against losing your job or disability.
From non-price parameters of a personal loan, first of all you should check:
- Loan sum – varies from 100 to 100 000 AUD and is maximum for secured ones.
- Maximum term – ranges from 1 to 10 years and is higher for secured personal loans.
- Security – Australian banks may demand a security to be pledged against the loan or have not such claims. Secured credits often have more profitable for a client conditions comparing to the unsecured ones.
- Interest rate type. The interest rate on your loan can be fixed or variable. The fixed rate usually is lower, but the variable personal loan, as a rule, has more convenient early repayment conditions.
- Redemption frequency – can be on a weekly, fortnightly, monthly or other basis.
- Other features – income requirements, credit holidays possibility, the list of necessary documents and other options may be important functions for you.
Step four. How to apply for a personal loan?
Applying for a personal loan you can do by filling an online form, by a phone, sending a letter, or you can visit the nearest bank branch. But, at first you should get a copy of your credit score from Equifax, Credit Savvy, Dun & Bradstreet or other company and appreciate the loan requirements. It will help you to choose the right form of the personal loan, so that your efforts will not be wasted.
In particular, to get a personal loan, you are to fit such criteria:
- be aged 18 and over
- to have a permanent home address
- be a national or a permanent resident of Australia or New Zealand (at some banks)
- to have a work or to be an entrepreneur
- to gain enough incomes
- do not have payment delays on current loans and communal expenses
- to be able to provide a guarantor, if your credit score is low
In order to confirm such requirements, your bank may request the following documents:
- Identity documents, like: passport, driver's license, Medicare or pension cards
- Financial documents: payslips, bank statements and ATO notices for entrepreneurs
- Other documents: statements from your transactional accounts and credit cards, documents about the collateral
After you gave all the documents or sent their online copies, the bank makes a decision of the loan providing, that usually does not take more than several hours. If the decision is positive, the bank sends you the contract by e-mail, post, or you can receive the documents in the branch. Then, the financial organization will transfer the loan funds to your transactional account or will send you a credit card.
If you have doubts about the legality of the financial organization or the draft agreement, you can turn to the government authorities, like Financial Ombudsman Service or the Credit and Investment Ombudsman. Their services are free and they are authorized for resolving disputes between lenders and borrowers.
Step five. How to improve your chances to get a personal loan (for bad credit scores)?
There is no guaranteed approval of your personal loan application in Australia, especially if you have a bad credit rating or want an unsecured loan. No credit check is possible only for loans from the relatives and only in the case if they trust you. But, you can increase your chances to the maximum. Ho to do it easily?
- Make up your financial budget and calculate how much you will be able to repay each month. If the applied sum exceeds your financial possibilities, the loan is more likely not to be approved.
- You may open a current account at the bank, to which you are going to apply for the loan, some time before the application. It can improve your chances of getting the financing. But, all the account commissions, like servicing fees, must be always paid in time. Also, you should not overdraw it. Set your salary, pension or other constant receipts to the bank account, and your chances of the loan achieving will increase greatly.
- Build up your credit score. You should always pay your bills on time, whether it is a bill for communal or a minimum loan payment at another bank. Remember, if you experiencing difficulties with your loan redemption, you should ask the bank for help with your bad credit as fast as it is possible. If the reasons are objective, a new repayment schedule on your secured or unsecured loan may be set with minimum negative effect to your credit score.
- To increase your credit rating it is also useful to open a savings account and to replenish it regularly, at least on small sums. In such a way, you show the bank, that you control your finances and are disciplined, so you will repay the probable personal loan in time.
- Set up automatic payments from your current or savings accounts to the loans. In such a way you will never miss your minimum monthly repayments and never have bad credits.
- Do not make many applications for personal loans at once. It may decrease your approval chances and lower your credit score, especially, in the case of refusals.
But, if the above advices all the same did not help you, and you got the application refusal, do not despair. In such a case you can delay your purchase and try to accumulate money by yourself, get a loan from the relatives or from Gumtree. If you choose the last variant, do not forget to check the lender carefully, in particular for the availability of an Australian Credit License.
Personal loans can speed up a purchase and improve your life level. But, such a privilege is not free, the interest and commissions are rather high. Thus, it is wisely to postpone the personal purchase, especially if only several months are required to save up. Do not forget to make up a budget and to build your credit rating before applying. You should check the credits conditions carefully and never get more than two personal loans. Set up an automatic payment from your current or savings account and never miss monthly repayments. Follow the above and your consumer loan does not turn into a headache.