A personal loan is a monetary loan you can get from a credit provider such as a bank, credit union or online lender – usually for a specific life purpose like renovating your home, paying for a holiday or consolidating several smaller loans.

Lenders approve personal loans by evaluating your creditworthiness.

When you enter into a contract for a personal loan, you typically receive money in a lump sum and agree to repay the lender back the money in regular instalments over a specific length of time.

You also pay interest on the amount you borrow, and in some cases, you may pay fees and other charges. These interest rates, fees and charges can vary from lender to lender, loan to loan and borrower to borrower.

How do personal loans work?

If you’re considering a personal loan, you should become familiar with some of the details, including how much you can borrow, how to apply and how much they cost. Here are some of the main concepts to remember:

• The amount you can borrow. Personal loan amounts can be very small or very large. We’ve seen lenders offer loans as little as $500 and as large as $70,000.
• The application and approval process. You can apply for some personal loans online in a matter of minutes and be approved (or denied) just as quickly. With others, you may have to visit a branch and it may take days for the approval process to complete.
• The cost. On top of requiring you to repay the loan amount, lenders make their money by charging you in a number of ways. These may include interest on the loan, as well as fees like an establishment fee, monthly fees, late payment fees and early discharge fees. Your specific combination of charges will be described in your contract.
• The loan term. This is how long you’ll be paying off the loan. We’ve seen loan terms as short as 3 months or as long as 7 years.
• The amount of repayments and when they are due. Your loan amount, interest rate and loan term will be set in advance, so it’s easy for the bank to calculate exactly what your regular payments will be and when they are due.

Types of personal loans

Here are the main types of personal loans you may encounter:

• Unsecured personal loans. Your standard personal loan you can use toward various life projects like a holiday, home renovation or medical bill.
• Car loans and other secured loans. A personal loan where you offer up an asset as collateral in case you can’t make your payments. This collateral is officially known as the security. Take for example a car loan, where the purchased car serves as security that the bank can repossess if you can’t make your payments
• Debt consolidation loan. A special type of personal loan you would use to pay off several smaller loans.
• Line of credit. A personal loan where a specific amount is available for you to borrow, but you don’t have to borrow it all. You only pay interest on the amount borrowed.
• Quick cash loan. A personal loan that doesn’t have a strict acceptance criteria so that people with lower credit scores can get the loans they need. These often come with higher interest rates and fees.

How much do personal loans cost?

The cost of personal loans will differ from person to person and loan to loan. A large part of this comes down to your creditworthiness. For example, someone with a higher credit score and a more positive borrowing history will often pay less for the same loan than someone with lower marks.

Here are some factors that will determine how much you’ll pay:

• Interest rate. This the percentage your debt will increase every year. Most personal loans will charge an interest rate. The Australian Securities & Investments Commission has capped interest rates at 48% but we’ve seen rates as low as 5.75%.
• Fees. Many loans will also charge fees on top of the interest, such as a one-off establishment fee to set up the loan or even monthly fees. Some very small loans might do away with an interest rate altogether in favour of one set loan fee.
• Comparison rate. This is simply a loan’s interest rate when fees are factored into it. Since not all loans charge the same fees, this comparison rate makes it easy for you to compare the loan cost of several loans side-by-side.
• Length of loan. Since your interest rate adds to your balance each year, the longer you have your loan, the more you’ll end up paying in the long run (all else being equal).
• Amount borrowed. Generally speaking, the more you borrow, the more you’ll end up paying for the loan.

How do you apply for a personal loan?

1. Decide how much you want to borrow. Work out how much money you need for your holiday, home renovations, debt consolidation or whatever personal project you need the funds for.
2. Work out how much you can afford for payments. Use a loan calculator to work out how long you’ll need to pay back the loan, based on how much you can afford to pay back per month.
3. Compare personal loan options. Identify a few lenders with loans that meet your criteria from the first two steps. You can find special loan offers for Credit Simple users here.
4. Gather your paperwork. Gather together any paperwork the lender asks for. This may include ID, bank statements and proof of address.
5. Apply. You can apply for most personal loans conveniently online.

Does applying for a personal loan affect your credit score?

When you apply for any loan, your credit score can dip slightly. However, with Australia’s Comprehensive Credit Reporting system, regular on-time payments can help your score go right back up.

Some lenders will advertise something along the lines of “free rate quote that won’t affect your credit score.” This means they will quote you a rate based off of basic info like your income and the amount you want to borrow – without doing a credit check.

But this is not the same as applying for the loan. If you want to apply for the loan based on the rate quoted to you, you will usually have to go through a credit check and your score may dip as a result.

Who should get a personal loan?

You should only get a personal loan if you have a specific purpose in mind for the money: to help pay for a special project, purchase or life event, or to help out in a time of emergency.

Taking out a lump sum without any real purpose for it could lead you to squander it and end up with a large debt with not much to show for it. For regular ongoing purchases you plan to pay off regularly, you could consider a credit card instead.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual or business. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

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Comparing credit cards the right way can be rewarding, because there’s a credit card that can cater to almost every lifestyle and financial need.

When you compare, you’ll be looking at everything from interest rates, to reward programs to promotional offers to fees.

Compare credit cards by type of card

Since you probably already know that closing your accounts too often can hurt your credit score, we hope you’ll keep your card for some time. That’s why it’s important to choose the type of card that’s right for you – so you can enjoy its lifestyle benefits for time to come.

Here are the main types of cards:

• Reward credit cards. Cards that let you earn points you can redeem for gift vouchers, merchandise, travel, cash and more. These are great for people who pay off their credit card every month (so as to avoid interest).
• Frequent flyer credit cards. A type of rewards card that works with your airline’s frequent flyer programs to supercharge your points accumulation. These are great for people who fly a lot and who pay off their cards every month.
• Low-rate credit cards. Cards that charge a lower interest rate on purchases compared to most other cards. These are great for people who occasionally carry a balance, such as at Christmas time.
• No annual fee credit cards. Cards that don’t charge a yearly fee just to carry them. These are great for people who don’t use their card a lot or who keep their card mainly for emergencies.

Compare cards by interest rate and fees

Once you know what kind of card you want, you’ll want to find out how much it will cost you. Costs usually come from:

• Interest rate. The percentage your debt or balance will grow per year. Go for a lower interest rate if you think you’ll often carry a balance from one month to the next.
• Fees. These may include annual fees, cash advance fees, international transaction fees, additional cardholder fees and late payment fees. The fewer fees the better, although annual fees are sometimes unavoidable for certain types of cards like rewards cards.

Compare by the promotional offer

Depending on how you want to use the card, you may want to consider any introductory offer that comes with a credit card. Here are some of the most common:

• 0% purchase rate. These cards charge 0% interest on purchases for a limited time, such as 6 months or a year. This might be a good option if you plan to make a lot of purchases at once, such as at Christmas time or before a holiday, and could use a few months to pay it off.
• 0% balance transfer. These cards charge 0% interest, up to a certain amount and for a limited time, on existing debt you transfer over from other cards. These are good for people who want to consolidate debt from multiple cards and have a plan to pay it all off by the end of the promotional period.
• Extra rewards or points. Some rewards cards will offer extra rewards or points just for signing up. For example, a travel card or frequent flyer card could offer a free domestic flight or a rewards card could offer 10,000 free bonus points.
• Waived annual fees. Some cards will temporarily waive the annual fee, such as for the first year.

Compare credit cards by their perks

Many cards will come with additional perks that are also worth keeping your eye out for. These can include:

• Free travel and medical insurance
• 0% foreign transaction fees
• Airport lounge access
• Concierge services
• Purchase protection and extended warranty
• Retail partner discounts
• Hotel status credits
• Event tickets

Bottom line

Conducting your credit card comparison the right way is important for a number of reasons. It can keep you from paying too much for your card and it can ensure that you enjoy valued perks, rewards and lifestyle benefits on an ongoing basis.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

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Want a more efficient and effective way to compare home loans? Just follow these steps:

1) Identify the non-negotiable features you need.

Google those features and shortlist the banks that offer them. Forget about the others, as there’s no reason to spend time of offers that don’t suit your needs.

Learn here about all the features you might need. 

2) Narrow your list even further by looking at the comparison rates.

The comparison rate is a government-mandated rate that lets you quickly compare home loans side-by-side since it incorporates the impact of fees into the interest rate. We’ll look at fees and interest rates later but for now, the comparison rate makes it easy to weed out unfavorable loans.

3) Research each loan’s interest rate, fees and other features.

List your new loan options from step two in a column and put three headings across the top:

• Actual interest rate. This is how much your debt will grow each year. The lower the better.

• Fees. There are dozens of possible fees (think “application fee” and others). Look for options with lower and cheaper fees. Learn all about home loan fees here.

• Comparison rate. The effective interest rate after fees are factored in.

• Features. All options on your list will contain your non-negotiable features. This list is for other features you may find useful.

You’ll now have a table where you can fill out the relevant details. So get filling!

4) Talk to the banks.

It’s a highly competitive market, so call all the banks on your list and try to negotiate a better rate, citing lower rates you’ve found elsewhere.

See if they’ll drop fees that other banks don’t charge or that don’t seem relevant.

If they agree, ask them to quote you a new comparison rate – then plug that into your table.

If you’re not the assertive type or you find this too time consuming, you can always talk to a home loan broker to help negotiate with banks on your behalf.

5) Sort by comparison rate.

Look at the banks that have the best rate and then consider if you feel comfortable taking out a loan with them.

This is where you can take soft traits into account:

• Do you feel more comfortable with one of the big 4 or are you OK with a smaller bank?

• Did you establish rapport with the loan officer?

• Do you find any of the other features from your table useful?

• Do you like the look and feel of the lender’s app and other online tools?

That’s all there is to it

Comparing home loans doesn’t have to be complicated, but you do have to be thorough. As long as you do the research and stay organised, you should be able to home in on the right loan for your needs.

Once you do, the next step is to fill out your application.

The post How to compare home loans appeared first on Credit Simple.

Most home loans come with their share of fees. Don’t fret over the length of this list, as you probably won’t be subject to all of them. You may even be able to convince your lender to nix a few.

It’s also not an exhaustive list as every lender has its own fee schedule.

Without further delay… your list of the most common home loan fees you might see:

Upfront fees

These are one-off upfront fees you may encounter at the beginning of the home loan process. They may include fees to your lender and to interested third-parties like the government and your solicitor.

Upfront lender fees

• Application fee. Also be called an establishment fee and it pays for the lender to organize your loan whether you settle or not. Some lenders will waive this fee.
• Valuation fee. Pays for a qualified independent valuer to assess your home’s value. Some application fees may cover this up to a certain amount, with you paying any difference.

Upfront government fees

• Stamp duty. A percentage of the total cost of your property, which goes to your state’s revenue department (percent varies by state). It’s more of a tax than a fee.
• Mortgage registration fee. Pays the state to register the purchased property as the security on the home loan.

Other upfront fees

• Conveyancing fees. Fees paid to your solicitor or conveyancer (if you choose to use one) to help you prepare and organise your contract.

Ongoing fees

These are regular, ongoing fees you may have to pay your lender throughout the life of your loan.

• Monthly service fees. A regular monthly account-keeping fee.
• Annual fees. A yearly fee that usually only applies to package home loans, which are home loans bundled with other financial products.

Exit fees

These are one-off fees you may have to pay when you pay off or close out your loan.

• Discharge fee. Also called a settlement fee, this applies when you close out your loan (ie, pay it off, sell your property or refinance).
• Early-repayment fee. Applies when you pay off your loan early. Lenders can charge this on any fixed-rate loan but cannot charge this on variable-rate loans approved from 1 July 2011*.

Special fees

These are fees you might have to pay if you’re taking out a special type of loan, like a fixed-rate loan or low-deposit loan.

• Rate lock fee. A special fee to lock in your rate with a fixed-rate loan.
• Security guarantee fee. A special fee that applies when you have a guarantor on your loan.
• Lenders Mortgage Insurance (LMI). An insurance premium that applies when you take out a low-deposit loan (usually under 20% deposit).
• Redraw fees. Apply when you withdraw funds from a loan account that you’ve made extra repayments into.

Bottom line

Fees are a fact of life, especially for a financial product you’ll carry with you for a long time. It’s important to become familiar with this list before you start researching home loans. That way you won’t be caught off guard when you do come across these fees in your search and you’ll know what you’re talking about when it’s time to negotiate your loan terms.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

*https://www.legislation.gov.au/Details/F2019C00090

The post Home loan fees you may encounter appeared first on Credit Simple.

Watch out! Your credit score could soon affect the interest rate you pay. That’s good if you’re a “unicorn” with a credit score from 801 to 1,000, and not bad if you’re a “thoroughbred” with a score of 601 to 800.

If, however, you’re a credit “donkey” at the very bottom of the credit score pile, a credit pony at 201 to 400, or a farm horse from 401 to 600 you could well pay more.

Why “donkeys” pay more thanks to their credit score

That’s because Australia lenders will soon be adopting a new style of “risk-based pricing”. That means they offer different rates to customers depending on how bankable you are as a borrower. At the moment you’re offered the same rate whether you’re head and shoulders better than other borrowers or someone who has a pretty average record. Here’s what you need to know:

• It’s new. Risk-based pricing is new in Australia. In the past “negative” credit scoring only measured you on your defaults. As “positive credit reporting” becomes more common your payment history will be taken into account. The data enables lenders to make better judgements about whether we’re more likely to pay or default.
• Who’s offering it? Peer-to-peer lenders such as RateSetter and SocietyOne do this already, says Steve Brown, director of bureau engagement at illion, Credit Simple’s parent company. They rate you  from A-E according to your credit score. It’s very much the norm now globally for banks to price according to credit scores as well. We’re playing catch-up here in Australia. 
• Why do it? Risk-based pricing is starting to happen over the ditch in New Zealand. Lenders want to attract the best borrowers who they know will pay the loan back without being chased. By offering lower rates to the unicorns and thoroughbreds banks and other lenders reduce their risk. It’s also a marketing tool to attract better customers.
• What about mortgages? Sooner or later you’ll be offered mortgage rates based on your credit score, says Brown. It already happens informally. Banks are sometimes willing to knock a few points off their mortgage rates to gain or keep a good customer. Conversely, borrowers whose bills get in the way sometimes have to go to second tier lenders such as finance companies to get a mortgage at all. Typically the rates will be higher than banks offer.
• Wait, but my credit score sucks. As with mortgages, there is already an informal system that means borrowers pay more if they’re swimming in debt. Aussies with really poor credit scores may not be able to borrow from the bank or credit union at reasonable rates and be forced to go cap in hand to finance companies. For the very worst credit scores the only choice may be payday lenders that charge much higher interest rates.

Never fear. Credit Simple is here with some good advice even if you’ve sabotaged your own credit score. You can get yourself ready for risk -based interest rates by cleaning up your credit score now.

How to get better loan pricing

Start by checking your credit record by ordering your report from all four agencies: illion, Experian, Equifax, and the Tasmanian Collection Service. Go through your report with a fine tooth comb. If you think any entries are incorrect or unfair, contact the bank, finance company, or other credit provider such as utility companies  and ask for them to remove these.

The next step to cleaning your credit record is to pay off any debts that have led to defaults. Ask the credit provider to remove the default once you have.

Finally, start paying each and every bill on time including your rent if you’re a tenant. If you need to start budgeting, ensure this happens. Every single payment is a positive mark on your credit record and soon you’ll be moving out of donkey territory and becoming altogether more desirable to lenders.

The post How your credit score affects the interest rates you pay: Welcome to the brave new world of risk-based pricing appeared first on Credit Simple.

Most Australians stick with the major banks when they have a home loan, even though switching to a non-major lender could take years off their mortgage and save them tens of thousands of dollars.

Home buyers cite a range of reasons why they don’t take advantage of better rates. These include dislike of paperwork, the perceived costs of refinancing, the effort of changing direct debits and the imagined inconvenience of dealing with more than one financial institution.

But these concerns are often based on misconceptions. The reality is that interest is by far the largest single cost of a home loan, and the effort and costs of switching are minimal when stacked up against the savings to be made by switching to a lower-rate loan.

Just how much is this costing?

A recent check of the RateCity.com.au database shows a gap of nearly 1 percentage point between the average standard variable rate charged by bank lenders (5.28 per cent) and the average rate charged by all home lenders (4.40 per cent). On a 30-year loan of $350,000, this difference would save the borrower a massive $67,161.

There are plenty of alternatives to banks, with credit unions, building societies and non-bank lenders offering dozens of cheaper home loans. So why don’t borrowers refinance to cheaper loans?

According to a consumer survey conducted by RateCity.com.au, these reasons include perceived good value on interest rates and fees, keeping financial products together, lack of time for paperwork and a feeling that their lender makes it too hard.

The survey also found that about one third of Australians haven’t changed banks since their first bank as a child.

The truth is that the standard refinancing process isn’t a big deal and can be quite quick. It usually takes from two to four weeks, though some lenders offer a fast-track process that can complete the entire change-over within three days.

Costs of refinancing – are they really that high?

A common misconception among borrowers is that refinancing costs can be high. But this isn’t necessarily the case.

Most lenders charge a discharge fee. But with average discharge fees at $250, this isn’t a big bar to switching lenders, compared to the savings in interest charges.

The new lender may require you to pay upfront fees.  The average start-up fee on a new home loan is around $400, but RateCity.com.au has identified more than 1200 loans with no upfront fees at all.

Even if a new lender does charge such a fee, you can ask to have it waived. Many lenders will do exactly that to win your business.

If your existing loan is on a fixed rate, there may also be a break fee. This amount is determined at the time you break the contract and is based on how much your bank stands to lose in interest repayments.

As a general rule, the more the variable rate has dropped since you first took out your loan, the higher the break fee will be. This can be the biggest cost of moving, so it pays to check first.

Are banks safer?

Many Australians assume major banks are safer than non-majors because they are cashed-up and secure. In fact, building societies and credit unions are just as highly regulated as banks.

Mortgages are long-term financial products, but there is no need to feel you are locked in for life. Refinancing is easier than many people think, and it is not uncommon for borrowers to switch lenders several times over the course of their loan.

While factors such as tradition and perceived convenience may seem persuasive, in the end it’s the total amount of interest you pay that makes the crucial difference. It’s well worth making the effort to be sure you’re getting the best value from your mortgage.

This post was supplied by our friends at RateCity.com.au.

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