Personal Loan Guide

14 June 2017

What is a personal loan?

A loan for your personal use that must be paid off over a set period of time. This can be secured by an asset that you have agreed to put up as security or unsecured meaning you have borrowed money based solely on your credit history and ability to repay i.e. earnings. As a general rule a personal loan is for a smaller amount and shorter duration than a home loan.

 

What are the different types of personal loans?

Secured

This is a loan that is secured against an asset, typically a car, boat, or even a savings account. If you fail to repay your loan, the lender can seize the asset and sell it to get their money back.

Advantages

The key advantage with a secured loan is that you have access to cheaper interest rates. This is due to the fact that there is less risk to the loan provider.

If your credit rating is not perfect you may find borrowing difficult, however entering into a secured loan may provide finance options.

Disadvantages

You can lose the asset you put up as security for the loan. 

Unsecured

This is a loan where there is no security against the borrowing, hence the lender is providing the loan based on your credit worthiness. 

Advantages

If providing security is a problem for you and you need cash this is a possibility to gain the finance you need.

Disadvantages

With no security the interest rates will be higher and there will be stricter criteria from the lender to qualify for the more competitive rates.

Debt Consolidation

Loans are either secured or unsecured but we include Debt Consolidation in this section as it is often described as a type of loan by the providers in the market place. Debt consolidation is the act of combining multiple loans, usually of different rates from different providers into one single loan. An example would be combining some credit card debt, a finance company personal loan and perhaps some cash borrowings into one consolidation loan.

Advantages

The reason to do this is that you should achieve an overall rate that is cheaper and it should be easy to manage with just one payment to make. The loan provider can structure the debt over a longer period to make it easier to pay off i.e. smaller weekly payments.

Loan providers will want to work with you when it comes to structuring a debt consolidation loan. The idea being they understand all your financial commitments so they can help you to get on top of your finances.

Disadvantages

You may incur fees getting out of your individual loans and then will have to pay establishment fees to setup the debt consolidation loan.

Unless you fix what got you into debt in the first place, just consolidating your debt will not fix your financial problems.

 

Where can I get a personal loan?

Banks

Banks offer personal loans with their rates starting at around 12.95%. You can expect banks to be stricter when it comes to assessing your eligibility for a loan. 

Credit Unions / Building Societies

Personal loans are the bread and butter of Credit Unions and you will be able to achieve more competitive rates than the banks. You will also benefit from the cooperative ownership aspect of credit unions and building societies in that you can get rebates to fees based on the amount of business you do with them. Interest rates start at around 9.95%.

Finance Companies

Finance company rates tend to start around 9.95%. This sector will often lend to people who do not qualify for a loan with a bank.

Mortgage Brokers

Mortgage brokers act as a middle man offering advice for a commission from the underlying provider. You can get a good rate and usually free advice as they take their commission from the loan provider. Many brokers have access to a good coverage of the different types of financial institutions and hence will be competitive from a rates perspective.

Peer to Peer (P2P) Lenders

P2P lenders provide an online market place where they can match you the borrower with a corresponding investor. Borrowing rates start from under 10% and are dependent on your credit rating. P2P was introduced in New Zealand in September 2014 and is licensed by the Financial Markets Authority.

 

How much can I borrow?

 This depends on a number of factors. Are you are seeking secured or unsecured? What is your financial position and the level of your income to support the loan? However, there are definite limits around how much institutions will lend particularly with unsecured lending. We provide a comparison table of personal loan rates that you can sort by minimum loan amount here.

 

What is the PPSR?

The Personal Property Securities Register (PPSR) was established by the New Zealand Government in 2002 as a single online register for all the security interests (claims against personal property other than land) that lenders or businesses need to record.

So how would I use the PPSR if I was buying something?

Say you want to buy a second-hand ute for your business, the last thing you need is for a finance company to repossess it because the seller still owes money on the vehicle. That would ruin your day!! To find out if any business or person has a registered claim (security interest) on the ute you can check on the PPSR website or check their database via text.

To be able to search the PPSR you need to register with them. You can find all the details on this government site.

 

Personal Loan Checklist

Get Quotes

Each loan provider will have their own fees i.e. Establishment fee, monthly fee, early repayment fee to name a few. These fees are added to your loan principal and hence effect the weekly repayment amount. The only way to properly compare each loan is to get an actual quote. There are a huge amount of providers in the market and you should not hesitate to be up front in saying you are shopping around and want an actual quote. For example, how much will loan repayments be for a 3-year loan of $10,000?

Credit Check

Know your own credit rating. Lenders use you credit rating to assess your credit worthiness and hence your eligibility to borrow at lower interest rates. If you have an excellent credit rating this is a real bargaining chip for you. You can find out all information at this government site.

Research

Get your finance in place before you go to purchase. Often you can obtain finance at the same place you are purchasing a car and it will seem very convenient. However, you need to check that you cannot achieve a cheaper rate by shopping around.

Proof of Income

When you apply you will need to show proof of income i.e. at least 2 payslips or a letter from your employer. You’ll also need to show how much your expenses are by providing a history of bank statements, usually around 6 months.