Different types of loans
There are three main types of loans that Australian financial institutions offer. These are:
Personal loans
Home loans
Business loans
Personal loans
A personal loan is defined as a loan that allows you to borrow money that can be utilised for a variety of purposes such as a holiday, car or home renovations. Personal loans can be offered by banks, credit unions or online lenders. The borrowed money must be repaid over time with interest. There are also some lenders that may charge fees for personal loans.
Pros and cons
The pros include:
They come with fast approval and payment times, making them useful for emergency situations or any other reason where you may need money quickly.
Unsecured personal loans do not require any form of collateral to be approved. This means that you will be not be required to put up your car or other assets as a guarantee that you’ll repay the funds. However, if you end up in a situation where you are unable to repay the loan based on the agreed terms, you will face significant financial and credit consequences.
Personal loans are very flexible, as they allow you to purchase almost anything you’d like with the approved amount.
Personal loans have a lower interest rate in comparison to credit cards.
The cons include:
Interest rates are often higher in comparison to other alternatives.
Personal loans have more requirements that need to be met in order to be eligible for the loan. For example, if you have poor credit or short financial history, fewer lenders will be available to you, meaning that your interest rates may end up being higher.
Many personal loans come with higher fees and penalties that can increase the cost of borrowing. Ensure you understand all of the fees and penalties associated with the loan before applying.
Home loans
A home loan is an amount of borrowed money that can be utilised to finance the purchase of a property. In most situations, the lender and borrower will agree on a term in which the loan is to be paid back. Most often, this is 25 to 30 years. As stated previously, home loans require larger deposits and come with other fees including stamp duty and Lenders Mortgage Insurance.
Pros and cons
The pros include:
The term length of a home loan can range anywhere from 1 to 30 years, which gives the borrower more flexibility in their repayments.
Home loan interest rates are often quite low in comparison to other loans. However, this is primarily due to the large amount of money borrowed, so even a small interest rate can incur large repayments.
Home loans offer variable, fixed and split term interest rates. This will be explained in more detail through later lessons.
The ability to utilise a guarantor for your loan.
The cons include:
Home loans require a minimum of a 10% deposit for you to be eligible. This deposit amount can take you years to save for.
There are many associated fees with the initial startup of the home loan.
The eligibility requirements are quite extensive.
The thought of being in such a large amount of debt can be quite daunting for a lot of individuals.
Business loans
Business loans are defined as lending agreements made between business owners and banks or financial institutions. Essentially, businesses require capital in order to fund the startup of their business or to enhance their current business by purchasing new equipment or stock.
Pros and cons:
The pros include:
Business loans offer lower interest rates compared to personal loans; these range anywhere above 6%. Quite often, this is based on the size of the loan and the intent.
They offer very flexible loan terms of 1 to 30 years.
The interest payments on your business loan can be deductible on your taxes.
Business loans have a relatively fast approval and payment rate, allowing you to put those funds towards your business faster.
The cons include:
Some banks have a minimum loan amount. For example, ANZ’s minimum loan amount is $10,000.
There can be a preference towards already established businesses rather than startup businesses. This is due to it being a safer option for the banks, as startups have a lot more risks associated with them.
Some banks may require some form of collateral for business loans. This may be your property or your car. Without a form of collateral, you will be required to apply for a loan that is unsecured. This often limits the number of banks available and can lower the borrowable amount.
The eligibility requirements can be quite extensive. Some banks require proof of income from your business to ensure that you are able to comfortably able to pay off the loan.