Yaspan Tech, Computers, Gadgets, Reviews, News and Analysis
Ideally, none of us would ever require a personal loan for anything other than investment purposes. In a not-quite-so-perfect world, though, the reality is that personal loans are a multi-billion dollar business for our financial institutions. So what should you think about before you apply for a personal loan?
In order to make a personal loan work for you as well as for the financial institution you’re borrowing the money from, you need to have a game plan before you apply. Here are some important things to think about before jumping into debt.
You probably know how much you can afford to borrow – but are you sure that you will be able to afford the repayments on your personal loan? The only way to truly know is to have a comprehensive written budget – try this budget calculator – and to ensure that the loan repayment can be easily absorbed. Don?t forget to take into account any future increase in costs or unpaid leave you might take down the track.
To a certain extent your loan term will be dictated by your repayment ability, but you should choose the shortest loan term that you can comfortably afford. The longer your loan term, the more expensive the lifetime cost of your loan will be.
The table below outlines the difference in overall cost of a $10,000 loan at an interest rate of 12%, with a comparative loan term of five, seven and 10 years:
| Loan amount | Loan term | Interest rate | Monthly repayment | Lifetime cost |
| $10,000 | 5 years | 12.00% | $222 | $13,347 |
| $10,000 | 7 years | 12.00% | $177 | $14,828 |
| $10,000 | 10 years | 12.00% | $143 | $17,217 |
Source: Canstar. Calculations are indicative only
A secured personal loan is secured against a particular asset. That means that if you fail to meet your repayment obligations, the lender has the right to take possession of the asset and sell it in order to recoup the borrowed funds. Because the loan is secured by an asset, this type of loan is seen by the lender as a lower business risk and as such a secured loan will tend to attract a lower interest rate. Currently on the CANSTAR database, personal loan interest rates range from a low of 4.64% to a high of 14.65% for a secured personal loan.
An unsecured personal loan, as the name suggests, is money that is lent without the lender taking security over an asset. This makes an unsecured loan a higher business risk for lenders and the interest rates charged will generally reflect this. Currently on the CANSTAR database, personal loan interest rates range from a low of 5.99% to a high of 18.70% for an unsecured personal loan.
