Secured Loans – A secured loan has some asset held as collateral against payment.  A car loan is an example of a secured loan.  If you don’t pay your car note, the lender has the right to confiscate your ride.

Unsecured Loans – An unsecured loan has no collateral set against it.  A credit card is an example of an unsecured loan.  Unsecured debt is usually higher in interest and fees than secured debt because if you don’t pay, it isn’t as easy for the company to recover the loan costs simply by confiscating some asset.

When it comes to taking out a personal loan, FIDO suggests that you distinguish between wants and needs.  By distinguishing these two areas, you can often save yourself hundreds or even thousands of dollars of interest by simply saving up for those items you want.  For example, if you want to take a trip that costs $1,000, at a 12% interest rate, you will pay about $135 in interest if it takes you 2 years to pay the loan back.  If, instead, you save up for the trip, you can place that $135 you would have paid in interest in savings account.

Once you have determined whether you are faced with a “want” or a “need,” then you can decide whether a loan is necessary or if you can simply save up for the item.  If you determine that you must take out a loan, then it is time to do your homework.

Determining how much loan you can afford

The very first step in obtaining a loan isn’t to go out, find that car you like, and have it financed.  Instead, if you do a little research and go into the office knowing what you can and cannot afford to pay each month, then you will save yourself potential heartache later.  Just because the car dealership allows you to finance a $25,000 vehicle doesn’t mean you can afford it.

The first step in determining what you can afford is to track your expenses – especially your fixed expenses for at least a month.  By doing this, you can see spending patterns and you know how much money you have each month to dedicate towards loan repayment.  FIDO has a wonderful budget calculator to help you visualize your income vs. your expenses.

Using Finance Calculators Online

Your next step in securing a personal loan will be to utilize one of the many finance calculator tools available online.  Infochoice is a great resource for this.  You will get a list that allows you to compare rates – and in some cases, you can apply online.

When looking at the loan comparison, you may wonder what all the different numbers mean.  For example, you may see a chart that looks something like this for a $10,000 loan:

The initial two interest columns are the current variable rate.  If you choose a variable rate, you could wind up saving money on interest – if the interest rates go down.  If the interest rates go up, however, you could spend more money on interest than otherwise.  The comparison rate is the interest rate with all fees taken into account. According to the Personal Loans website, the comparison rate is mandated by the ASIC (Australian Securities and Investments Commission).  This rate includes both the interest rate and the fees and charges except:

• Any government fees or charges
• Charges applied in special circumstances
• Any perks to the loan

For more information on comparison rates, you’ll want to view the two available factsheets: Comparison Rates – A Consumer Guide and Comparison Rates: Frequently Asked Questions.

The next four columns in the above chart refer to a fixed-rate loan.  You’ll notice that while the “Greg Fixed” loan only has an interest rate of 13.89%, its comparison rate brings it up to being about 21.71%.  This means, for $10,000 of borrowed money, you would pay back a total of $12,416.41.  Make sure when you calculate the estimated monthly payments, you use the comparison rate, not the initial interest rate for a more accurate estimate of what you will need in your budget.

Fees

In addition to interest, various fees may be charged to a loan.  These fees include:

• Establishment Fee – the fee charged for starting up the loan.  It is often added to the amount being borrowed.
• Ongoing Fees – monthly charges for continuing the loan
• Exit Fees – watch out for exit fees.  If you pay off your loan early you may be required to pay a fee.
• Redraw Fees – if you are ahead on your repayment schedule, sometimes you can take out funds that were already paid into the loan.

Remember: While it might seem like a lot of work doing all the homework and comparison shopping ahead of time, it will save you hundreds (possibly thousands) of dollars – and your sanity.  By carefully planning for a personal loan that you must take out to meet a need, you can avoid falling into a potential debt-trap.

Who Should Not Apply

Those people that should stay away from bad debt loans include the following:

• Those that have a lot of outstanding debts
• Those that can gain a better loan rate elsewhere
• Those that do not have a plan to repay a bad debt loan
• Those that plan to use bad debt loans as a form of long-term financing

If you fall into any of the categories listed above, it is best to seek another way of finding the funds that you need. If you are seeking a bad debt loan for another reason, then you may find that this type of loan is exactly what you have been looking for.

Why Apply For a Bad Debt Loan

Believe it or not, bad debt loans can actually help you rebuild your credit. If you want to patch up your credit, or start building it up again from scratch, a bad debt loan is a great idea. Why? If this type of loan is paid in-full on time, your diligence will reflect positively on your credit record.

In addition, if you cannot find extra funds anywhere else, applying for a bad debt loan can help. Often, people that have declared bankruptcy in the past may not be able to obtain a personal loan. In this instance, a bad debt loan can come in handy.

The other reason why bad debt loans may help you is if you simply cannot pay your bills one month. Everyone goes through tough times, but it’s not a good idea to skip a bill payment. If you find that you need to make a payment, but you don’t have any cash, you can gain the funds you need through a bad credit loan.

Things to Think About

It never hurts to be extra careful when it comes to borrowing money. If you find yourself contemplating a bad debt loan, make sure that you run down the following checklist first.

• Look at every other loan option
• Read the loan fine print – are all the terms clear?
• What happens if a loan is not repaid on time? Are you penalized?
• Can you pay back that loan on time?
• Are you choosing the best bad loan offer out there?

Once you have gone through all of these questions, you will be better poised to apply for a bad credit loan. Clearly, bad credit loans aren’t always a bad choice, though they won’t work for everyone. Before you apply for any loan, make sure that you shop around – there are hundreds of bad credit loan companies out there, but only a few of them are worthwhile.

Photo by Thomas Hawk

You can be approved for a personal loan with your bank in just a few minutes. But how do you know you’re getting the best deal? Follow these tips to get a good deal on a personal loan.

Know your credit history

Obtain a copy of your credit file. Anyone who has had credit within the past seven years has one. If you have been denied credit, you are entitled to a free copy of your file. Veda Advantage is one credit agency that keeps credit files. Lending institutions use information obtained from Veda to determine your creditworthiness, which determines your interest rate.

Dispute any mistakes in your file

Mistakes in your credit file cost you money when you apply for any type of loan, and especially unsecured loans, where the interest rate is largely based on your credit history. You can find some information here on how to dispute inaccuracies in your file.

Shop around for the best rate

All interest rates are determined by the Reserve Bank of Australia’s interest rate, but rates do vary. This Web site provides a comparison chart of personal loan rates from different lenders. 

Track the market

If you don’t need the money for an emergency, keep an eye on interest rates for a few weeks, or even a month, to strike while they are low. If rates seem to be rising, it’s a gamble to apply for your loan right away or wait and see if they drop.

Save with a variable rate loan

Variable rate loans often provide lower interest rates than fixed rate loans. Most variable rate loans offer no penalties for pre-payment, either. If you can pay off the loan early, you can save big on interest.

Pay a little more

Adding just a few extra dollars to your loan payment each month can help you save hundreds of dollars in interest when you pay off the loan early. One way to do this is simply “round up” your payment. In other words, if your monthly payment is $141.92, pay $145 or even $150 each month.

Compare fees

When you shop around for a loan, ask about added fees, such as loan approval fees. Do the math when you compare loans with upfront fees versus loans with higher interest rates. Shelling out a few extra bucks now may save you hundreds of dollars in interest, long-term.

Have a co-signer

Bad credit? No credit history? Having a trusted relative or close friend co-sign on the loan for you, or put the loan in their name, with you making payments directly to them a few days before payments are due to the lending institution.

Look into loans through your union and other organizations

Credit unions often offer great deals and low interest rates on personal loans. Consider these options before going to a bank or another lending institution.

Use a credit card, instead

People with a strong credit file often get credit card offers with a zero percent introductory APR and a low interest rate after that. It might make more sense to borrow money on your credit card than taking out a personal loan through a bank. Take advantage of zero percent for the first year. You can always take out a personal loan to pay off the card just before the introductory rate expires.

Photo by loplop