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The Right Loan

Updated: Jun 13

There are many different types of loan available for various applications, and although most of us will require a loan at some stage in our lives, borrowing money can be a daunting idea. Deciding on the most appropriate loan will depend on your personal circumstances as well as the purpose of the loan.

Here are a few important things to consider so you don’t become overwhelmed with the process:

Is a loan right?

Generally, loans are taken out to secure investments which the borrower later pays back. Loans can be for an immediate cash injection when the unexpected occurs (see advanced payments offered by Centrelink loans), however they usually cover longer term investments of significant size.

A long-term personal loan is usually defined as a loan which will be paid back in 5-7 years. For example, you might need to take out a personal loan to pay for a wedding, expensive car repairs, or continuing education costs.

Secured or unsecured

As some personal loans will be for large amounts, lenders can require the borrower to offer security as a means of guaranteeing the loan. A secured loan simply refers to the fact that the lender may sell the secured asset if the borrower defaults or otherwise fails to pay back the loan. This can apply to real estate, cash deposits, and vehicle purchases. By using the investment itself as collateral, lenders feel safer to offer larger sums.

Most loans require monthly repayments consisting of the principle amount (or the amount lent) and any interest as it accrues. It is wise to set-up automatic payments as most lenders will penalise late payments with extra fees and costs.

What’s a mortgage?

In order to buy a home, most people will need to borrow a large amount to be paid back over a fairly long period of time. As a home loan is such a large amount, they are secured by a mortgage – a signed legal document which gives the lender title of the property until the home loan is paid back.

Fixed rate or variable

This refers to how the interest is repaid and will depend on your income, the size of the loan, and any future events that might hinder/assist your ability to repay the loan. A fixed rate loan is a good idea for those with consistent income who want certainty in their repayments. On the other hand, a variable rate allows you to pay back your loan more quickly depending on the current interest rate.

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