7 reasons your personal loan rate is high.

Written by Hamish Ferguson

February 1, 2023

Here’s what you need to know.

Personal loan rates in Australia can be high compared to Home Loans, and several factors contribute to this. However, before we go into the nuts and bolts of this, it is a good idea to define a Personal loan.  

A Personal loan is a loan that usually has a loan term of 1-7 years and will often be for smaller amounts of up to $10,000 (even though they can go as high as $50,000 for some lenders).

They usually have no asset provided as security and, therefore, heavily rely on the borrower’s creditworthiness to ensure the lender gets its money back. For example, it could be for a holiday or a 2nd hand car that is too old for lenders to use as security.

There are many reasons why a person applies for a personal loan, but these two are common.  

personal loan rates

7 reasons why your personal loan rate is higher than you might expect: 

1. Risk 

Due to the lender seeing the borrower as a higher-than-normal risk. If the borrower defaults on the loan, the lender has no assets to recover the funds. As a result, lenders may charge a higher interest rate to compensate for this added risk.  

2. Credit score 

Another factor contributing to high personal loan rates is the borrower’s credit score. A borrower with a good credit score is considered a lower risk to the lender and may be offered a lower interest rate. On the other hand, a borrower with a lower credit score may be seen as a higher risk and may, as a result, be offered a higher interest rate to compensate for this risk.  

3. Debt-to-income ratio  

The borrower’s income and debt-to-income ratio. A borrower with a higher income and a lower debt-to-income ratio may be offered a lower interest rate. In comparison, a borrower with a lower income and a higher debt-to-income ratio may be offered a higher rate.  

4. Length of loan 

Sometimes if the borrower offers to pay off the loan over a shorter period, this can lower the rate as the lender will feel safer that their money will return quicker.  

5. The type of interest rate 

The type of interest rate. Typically, lenders will have the option of either fixed rates or variable rates. A variable rate can change if the Reserve Bank of Australia changes the wholesale rate they offer to lenders; however, the benefit may be that this type of rate can be paid off quicker, often without penalty. Sometimes they also have the ability to redraw extra repayments.

A fixed-rate loan will give peace of mind that the repayments won’t change. However, there may be penalties if the borrower has more money and wants to repay the loan more quickly. 

6. Loan security  

Whether the borrower can make the loan secured. Suppose the borrower has an asset the lender is 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. 

7. A lender’s policies and practices 

Finally, the lender’s policies and practices can also influence the interest rate offered on a personal loan. For example, some lenders may be more competitive with their rates to attract borrowers of a particular type. In contrast, others may have a stricter lending policy and charge higher rates.  

So, what do you do if you want to get a personal loan? 

handshake deal on loan rates

Suppose you are considering taking out a personal loan in Australia. In that case, shopping around and comparing rates from multiple lenders is essential. Doing this will give you a better idea of the rates available and help you find the best deal for your needs. Just make sure you know whether you are applying for a loan.

Sometimes for a lender to quote a rate, you need to apply. If the bank says no, it is important to realise that this will show up on your credit report. It’s also a good idea to check your credit score and work on improving it if necessary. Remember, a higher credit score can often result in a lower interest rate. But why stop there?

If you want to control your finances and plan better for your future, turn to Help My Wealth. Our budgeting app, learning modules, and personalized coaching will give you the tools and guidance you need to succeed in the Australian property market. Plus, join our supportive community of like-minded individuals on the same path. 

Want to know more about this topic or how to get started? Then contact us here

Phone

0240141949

Email

info@helpmywealth.com.au

Address

Suites 1 & 2 Lake Macquarie Fair, 46 Wilsons Rd, Mount Hutton NSW 2290, Australia

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Phone

0240141949

Email

info@helpmywealth.com.au

Address

Suites 1 & 2 Lake Macquarie Fair, 46 Wilsons Rd, Mount Hutton NSW 2290, Australia

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