Updated November 21, 2022 –A personal loan can help you to achieve your goals and dreams sooner.
Whether you’re buying a new car, doing home renovations, planning a much-needed vacation, getting married, or consolidating your debt, a loan can be very helpful.
Below is everything you need to know about personal loans and how to get them.
What Are Personal Loans?
Personal loans make it possible to borrow a large sum of money to be paid back over an agreed duration with interest.
It’s a great option if you’re looking to buy a new vehicle, or to make improvements to your home without using all of your savings, or drying up your cash flow.
Unexpected expenses and emergencies are inevitable, so a personal loan could also be helpful if you need cash to pay for important things.
What’s The Difference Between A Secured Loan And Unsecured Loan?
A secured loan is where the lender requires some sort of guarantee against the amount that you’re borrowing from them, such as a vehicle, or a house.
Depending on your financial situation, the lender may offer you a lower interest rate compared to an unsecured loan.
With unsecured personal loans, you’re approved according to the lender’s assessment of your ability to make monthly repayments, rather than requiring additional security of an asset.
The fact that you won’t need to use your assets as collateral is beneficial, but interest rates are usually higher.
How To Apply For A Personal Loan?
Once you’ve chosen a suitable lender, you can speed up the loan approval process by having these documents on hand when you apply for your personal loan:
- Proof of identity
- Bank statements that show any savings or existing liabilities
- Proof of income (such as payslips or tax returns if you are self-employed)
NB: Don’t make multiple loan applications with different lenders.
Rather than shopping and applying for several personal loans hoping they will be approved, do proper research and only apply for one loan at a time.
The reason why is because every time you apply to borrow money, this can end up in a credit inquiry on your credit report.
Several inquiries in a short space of time can hurt your credit score, which could result in lenders considering you as a higher risk.
What Is The Minimum Income To Qualify For A Personal Loan?
Lenders will set a minimum income requirement as part of their loan qualification criteria.
This means the lowest income that you could earn and realistically make your loan repayments on time.
In Australia, this can vary between $22,000 and $26,000 per annum but this doesn’t guarantee approval, even if you earn well above these numbers.
The reason is that lenders make their decision based on how comfortably you can repay the loan.
For example, someone earning $20,000 per year applying for a $2,000 personal loan could be approved if they receive enough disposable income.
On the other hand, someone earning double that salary applying for a $15,000 loan could be rejected.
Typically, loan repayments should only take up less than 30% of your disposable income.
Keep in mind that your credit history plays a big role in your application being accepted.
What Disqualifies You From Getting A Personal Loan?
Reasons your loan application may be declined:
- You have a poor credit report or a low credit score.
- Your debt-to-income ratio is high.
- You don’t reach the minimum income requirements.
- You have an inconsistent employment situation.
How Do I Choose A Lender?
Comparing deals from a range of financial institutions will help you to find the best personal loan lender to suit your needs.
Start by making a list of features that you find important to help narrow down your options.
- Does the loan have any fees, such as application fees or monthly fees?
- Are there penalty fees for paying off the loan quicker?
- Do you prefer a fixed or variable interest rate?
- What interest rate are you looking at?
- What loan term are you wanting?
- What loan amount do you need?
How Can I Maintain A Good Credit Score?
Making sure that you pay things like your phone and electricity bills before they are due counts towards having a good credit rating.
If you have missed paying your bills on time, you are in arrears, or other debt collection activities recorded by a credit reporting body, this impacts your credit rating negatively.
You can check your credit rating and the accuracy of the information that makes up your credit history by credit reporting bodies.
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