Aussies suffering with a summer holiday debt hangover are turning to personal loans in a bid to get their finances back on track.
But while lenders see a spike in loan applications to consolidate debt in January and February, borrowers must be wary of potential traps that could see them repaying more than they have to.
A recent survey of almost 8,000 adults by Canstar Blue found that loan repayments were the biggest financial concern for 13% of respondents. The cost of electricity (29%) was the greatest cause of financial stress, ahead of health and medical payments (16%).
There is a significant difference between the lowest and highest rates on offer for variable and fixed rate unsecured personal loans. It could be tempting for households to tally up their holiday debt, panic and take out a personal loan without doing their homework. They could end up paying out a lot more than they need to that way though, and if you?re looking to consolidate debt, the last thing you would want to do is commit to even more. It’s important to shop around for the best rates and features on offer.
When considering a personal loan, think carefully about a loan term that would best suit you and your purpose. Cut the term short and you may find yourself struggling to find that larger amount of money each month that you will require in order to meet your repayment. On the other hand, if you spread the loan over too long a term, you’ll pay more interest overall.
Interest rates should also be a determining factor in your decision making. The difference between the highest and lowest variable rates on our database for an unsecured personal loan is currently 8.1%. That’s a huge difference and on a $10,000 loan over five years it equates to around $2,422 extra in total interest costs.
The following table shows the minimum, maximum and average interest rates currently on CANSTAR’s database.
|
Variable rate |
Fixed rate |
|
| Minimum |
6.90% |
7.99% |
| Maximum |
15.00% |
23.49% |
| Average |
12.54% |
12.98% |
Source: www.canstar.com.au 22/1/2015
1) Stick to the amount you want to borrow and resist upselling. The added interest is better off in your pocket.
2) Don?t be dazzled by the amount you will pay each month. Application fees and ongoing fees will bump that up.
3) Beware of introductory offers which may start with a low interest but then move to a higher interest rate after a period of time. Ensure the rate you pay throughout the life of the loan is competitive.
4) Treat gimmicks (cashback, prizes) with care. They can mask higher overall charges.
5) Ensure there is no early repayment penalty and you have the ability to pay lump sums without penalty. According to our data, the average early repayment fee is a little over $34.
6) It goes without saying to warn against missing a payment. We?re all human and slip up occasionally. Paying a little extra each month will give you a buffer against a missed payment penalty.
