Australia’s finance market is vast and finding the perfect loan for your particular needs might prove to be quite a difficult task.

This guide to the different types of loans available will help you get to grips with everything you need to get approved for the ideal loan.

Australians are exposed to a wide range of loans that are offered by different registered creditors, such as banks, online lenders and even unregistered loan sharks.

Loans allow you to borrow a fixed amount of money and repay it in equal amounts over a set period with a fixed interest or variable interest rate. The interest rate and the amount you borrow depends on the type of loan you choose, your financial situation, and your credit score.

Debt consolidation loans to simplify debt

Debt consolidation loans are designed to help when you are struggling to pay several debts to different lenders by combining all your debts into one large loan. The benefit of debt consolidation is that you will have one monthly payment to make instead of several, it can also lower the amount you repay each month, thus freeing up money for everyday living.

Although the debt consolidation loan repayment might be lower than your previous payments added together, if it's repaid over a longer-term, it could mean you pay more interest overall.

Flexible personal loans in Australia

Personal loans can be unsecured loans since you do not always need collateral when you apply for it. Personal loans come in all sorts of shapes and sizes but what you can get is based on the information held in your credit report, along with some personal details in your online loan application including your income, which doesn’t appear on your credit report. There are personal loans that are labelled for their purposes such as a car loan. You can normally borrow up to $35 000.

Secured personal loans in Australia

A secured loan is money that is borrowed against something that you own. If you fail to repay the loan, the lender has the right to take the asset you put up as security. Mostly, secured loans are secured on a property you own, i.e. your house thus most of the secured loans are home loans.

Secured loans are mostly used to borrow larger sums of money than personal loans can typically offer. Vehicle loans in Australia are also secured loans and should you be unable to keep up with your car loan repayments, the vehicle will be repossessed.

Types of secured loans

Except for securing your loan on your property, there are other ways of securing it. However, with these two ways you won’t be able to borrow a large amount of money and the interest rate could be considerably higher.

  • Logbook loans - those that are secured on your car.
  • Pawnbrokers - you secure your loan on your jewellery and gadgets.

Payday loans in Australia

These are short-term loans that are obtained online designed to be paid back within 28 days or by your next payday. Payday loan lenders can charge a fee or a fee and an interest rate. However, if you miss a payment, you’ll be charged more money which is when your payday loans can work out to be quite expensive.

Loans for people with bad credit

These loans are designed for people who don’t have a credit history or have a low credit score. A bad credit loan is also called a subprime loan.

With bad credit, you may struggle to get a loan from a bank or building society, but you might get it from another lender. Bad credit loan receivers are often asked to secure the loan because lenders will look at your borrowing history and judge you as ‘high risk’.

Guarantor loans in Australia

Guarantor loans are designed for people with a low credit score. You will need to ask someone else to be your guarantor when you take out a loan. The guarantor will be responsible for paying the debt if you can’t.

Your guarantor should be someone with a good credit history and will usually be a parent, another member of your family or your partner. Guarantor loans are known for having high-interest rates, but they can improve your credit score.

Things you should consider when you take out a loan

When you take out a loan, you should be wise and ensure that it won’t lead you to financial trouble and instability. Hence, you should consider all the following factors:

  • The representative interest rate: mostly the advertised loan interest rates are ‘typical’ or ‘representative’ rates that are only offered to at least half of successful applicants. You may be offered the advertised rate if you have a good credit history.
  • The loan amount: when you take out a loan, only take the amount you need. Never take a loan when you are not in deep financial trouble. Borrowing more money than you need as the bigger the loan amount, the greater the commitment you will be making and you might not cope with the repayment.
  • Repayments: make sure you can afford the repayments for the entire length of the term.
  • Comparing loans: make use of loan comparison sites to compare loans from different lenders to ensure that you receive the best deal in the market. You should compare loans based on your credit score and affordability.
  • Extra charges: consider all the administration charges for setting up a loan including early redemption penalties if you can repay a loan early, or penalties for late payments.

The current interest rates in Australia

In 2020, the Reserve Bank of Australia slashed the cash rate by 25bps taking it to a new record low of 0.25% in the second emergency move around the world.

The RBA board said they will not increase the cash rate target until progress is being made towards full employment and remains confident that inflation will be within the 2–3% target.

Furthermore, all Australian banks target the yield on 3-year Government bonds of around 0.25% that will be achieved through purchases in the secondary market.

How to get your loan approved in Australia

#1) Make sure you meet the criteria

Regardless of the type of loan you are applying for in Australia, you should:

  • Have Australian or New Zealand citizenship, or permanent residency
  • Be aged 18 years or older
  • Live in Australia
  • Meet the loan minimum income requirements and be employed or receive regular income
  • Have a good credit rating
  • Not be going through the process of bankruptcy

#2) Apply for the right amount

Avoid applying for a long-term loan while you need a loan for a short period. Make use of the borrowing calculator that will help you determine how much you might be able to borrow given your income and lifestyle.

#3) Build a good account history

How you manage your finances also determines your readiness to take a loan. Avoid overdrawing your account. This will not only help you avoid fees but it will also create a good account history as it shows you’re able to manage your existing finances effectively.

Different types of loans but there is only one suitable for you

This guide to the different types of loans will help you make a wise financial decision. When you are desperately in need of a loan, you may be tempted to take anything that you’re offered. But the guide will enlighten you, you will know what you are looking for and the features and rates you should be offered.