Vision’s 8 reasons your personal loan rate is so high.
Personal loan rates depend upon several factors, which will be explained in this article – so keep reading!
But first, we want to ensure you understand the personal loan. So here are some key points:
- Terms of 1-7 years
- Smaller amounts of up to $10,000 (but this can go as high as $50,000, depending on the lender)
- Generally, no collateral is provided by way of an asset like a home or a car (an asset can be used as collateral if possible – but not necessary)
- It can be either a fixed interest rate or a variable interest rate. Your personal circumstances then influence this rate.
Typically, personal loans are taken out to pay for a holiday, car or home renovations.
8 reasons why a personal loan is higher than you might expect:
1. Your income and employment
Relating the risk of the loan is the stability of repayments. Employees in a salaried role are considered more favourable by lenders in comparison to freelancers or those who have small businesses. This is because there is a more steady and secure income stream to make repayments.
2. Credit score
Another factor contributing to high personal loan rates is your credit score. The lower your credit score, the more likely a lender will charge you a high-interest rate. So it’s essential to check your credit score before shopping around.
If you discover that you have a low credit score, it’s a good idea to work on improving it. This could start by making repayments on time.
3. Debt-to-income ratio
Your income and debt-to-income ratio will influence your rate. A borrower with a higher income and a lower debt-to-income ratio may be offered a lower interest rate. Conversely, a borrower with a lower income and a higher debt-to-income ratio may be provided with a higher rate.
4. Loan duration
Sometimes, you can offer to repay the loan over a shorter period. In that case, this can lower the rate as the lender will feel safer that their money will return quicker.
5. Interest rate type
You can typically choose a fixed or variable rate for your loan. Of course, both options have pros and cons, but the choice depends on your goals and situation.
A fixed-rate loan can give you peace of mind that your repayments won’t change. Choosing a variable rate exposes you to economic change and, thus, rate hikes. However, it allows you to make early repayments and sometimes redraw extra repayments, often without penalty. On the other hand, a lender may charge penalties for repaying the loan amount more quickly on a fixed-rate loan.
Whether the borrower can secure the loan depends on whether an asset is provided as collateral. Suppose you have an asset you’re prepared to use as collateral, such as a car. In that case, the lender may offer a lower interest rate as the risk is reduced. However, suppose you can not provide collateral. In that case, you are seen as a higher-than-normal risk, and the loan is classed as an unsecured personal loan. The lender will charge a higher interest rate to compensate for the chance that repayments stop and the lender has no assets to recover the funds.
7. A lender’s policies and practices
Another influence is a lender’s policies and practices. For instance, some lenders are very focused on a particular type of borrower and thus will offer more competitive rates to attract them. In contrast, others may have a stricter lending policy and charge higher rates. Also, part of some lenders’ practice is to charge an origination fee, ranging from 1-10% of the loan amount.
8. The current economic climate
The current economic climate will influence a lender’s offered rate. For example, you may notice that personal loan rates are higher than they were a year ago. A contributing factor to this is Australia’s rising cash rate in response to inflation, employment and wage growth.
Lenders are businesses, and, as we all know, companies have margins to reach to operate. Thus, they must raise their rates to keep up with inflation.
So, what do I do to get a personal loan?
First, consider whether a personal loan is right for you and your situation. Then, consider your long-term financial plan and its goals- how will a personal loan affect them?
When you are ready to apply for a loan, the first step is to come to Vision. We can find you the best deal by comparing rates from multiple lenders.
If you would like to start your comparisons now, please use our basic loan repayments calculator. https://visionpf.com.au/resources/calculators/
Vision can find the best loan for you.
The process of finding a suitable loan rate can be daunting and time-staking. At Vision, we understand that everyone’s circumstances are different and are prepared to spend time with you to find the best loan for you. Finding the best deal on a personal loan could save you thousands in interest and fees. So, reach out to the team today to find the best deal!
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