Types Of Loans – Can Borrowing Help You?

Fast loans, big loans, small loans, high-interest loans, low-interest loans, the list is endless when it comes to the types of loans available to you. If you require some extra cash, whether it’s for a home or to cover Christmas costs, the right loan may be out there.

The state of your credit report is not the be-all-end-all when it comes to borrowing money. If you want a basic understanding of what you can qualify for, read on. So, if you can name it, this article may be able to shed some light on it. The world of borrowing is complicated, and increasing your awareness may be vital to financial success.

Please note, specific ideas and products presented in this article may not be on offer by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

Types of loans – Personal loans

Personal loans are what we can help you with here at Monzi through our lender-finder service. A personal loan is typically an amount between $300 and $10,000 and may be used for a range of different purposes. Obviously, this is different from a car loan or home loan. In most cases, you must repay personal loans over months or years.

Often being accompanied by higher interest rates, it may be best to ensure you can repay a personal loan before apply. Although, this is a good rule of thumb for all loans. Depending on the amount you intend to borrow, personal loans can be secured or unsecured. With this, unsecured personal loans may attract higher interest rates in some circumstances.

Depending on where you obtain your loan, you may not have to undergo a credit check. Alternatively, you may also receive approval with bad credit. A personal loan can be a good option for you if you want to extend a holiday, finish a renovation, or grab some extra cash to cover an emergency.

Types of loans – Home loans

Home loans are perhaps the most well-known type of loan on the market. As you’d expect, they’re loans that you can take out to help you purchase a home. Given the significant costs involved, you may then be required to make repayments for anywhere between 15 and 40 years.

In a perfect world, to avoid extra fees associated with low deposit home loans, you will want to pay a deposit of at least 20%. However, if you live in a capital city and have to combat high housing prices, this may not be an option for you. Many potential buyers may consider the features of the home loan (e.g. offset accounts) more important than the accompanying interest rates.

For a successful home loan application, your credit, income and life circumstances need to be up to standard. If you are a reliable borrower, a good saver, and can prove to your lender that you are a suitable applicant, you may qualify for a home loan.

Types of loans – Small business loans

Business loans of all sizes are available to company CEOs. However, small business loans can be quite common, as they can be used to help fund an entrepreneur and day-to-day fund operations.

When considering these types of loans, it may be worth evaluating your business’ financial situation and structure. Moreover, consider why you are borrowing and the predicted profitability of the company. Business loans can also be secured or unsecured.

Consider talking with a financial advisor before taking a small business loan to fund a venture. Business loans may be better for the established business, as there is less risk of failure. If your company has been running for a while, but you’re looking for a bit more help covering costs, a business loan could be a valid option for you.

Types of loans – Payday loans

Payday loans are an often discussed type of loan. In short, they usually refer to small, unsecured cash loans that are assessed fast so you might receive your cash ASAP. With this, they may come with high costs and are often repaid over brief repayment terms. As a result, they may not always be the most manageable type of loan.

If you’re looking for an alternative to payday loans, then you could consider a personal loan instead. At Monzi, we work with lenders who offer personal loans from $300 to $10,000. As a guide, you may repay these loans over periods ranging from 12 to 24 months, depending on the amount you borrow. As a result, they may a more manageable option for your budget. Apply with Monzi today.

Types of loans – Investment loans

Investment loans are growing in popularity with time. Most Australians have an investment of some description. If that investment is property, it generally requires a loan. However, there are other investments beyond property that you can also take out a loan to fund. An example of this is a margin loan or borrowing money to invest in stocks.

However, borrowing to invest (also known as gearing or leverage) may only be used for a handful of investments. Keep in mind that investing is associated with high stakes. You can manage investment risk by taking a few proactive steps. These may include locating the best investment loan on the market, diversifying your investment portfolio, and having an emergency fund to fall back on if something unexpected happens.

If you’re looking for a good challenge, then an investment loan may be an excellent way to boost your returns. Just be sure you’ll be covered in case of a loss. Moreover, remember that you should not apply for an investment loan as a novice investor.

Types of loans – Car loans and other vehicle loans

There are also loans on the market that are specifically for car loans, along with loans for boats, motorbikes, trucks etc. As with most other types of loans, shopping around can potentially save you a lot of money.

Whilst, some people can afford to cover these costs in cash, sometimes the smarter move is to take a loan for more expensive vehicles. This way, if another emergency happens in your life, you can afford to cover them without struggling to find the money.

When comparing loans for vehicles, you should consider exactly how much you can spend, what the potential repayments will be, and what the interest rates are. With car loans, the machine itself is typically the security. Hence, if you don’t repay your loan, your lender may repossess the vehicle.

Credit cards

Sometimes, a credit card may be an excellent alternative to other types of loans, if you are only looking for a small amount. However, in some cases, the interest rate on your credit card may be higher than the interest rate on a personal loan. If you already have a credit card, it may be less hassle than making a loan application.

When using a credit card, you should only spend what you can repay. Some companies may offer credit cards with rewards programs. These programs include frequent flyer points and shopping discounts, which can make it more enticing to use the card instead of taking a loan. Some cards may also come with various insurance benefits, such as travel insurance that may be relevant for you.

However, remember that old say if you can’t pay it in debit, you may not be able to afford it on credit. If you do this, then you may be able to use a credit card effectively.

Interest rates

As mentioned briefly above, interest varies depending on the types of loans available, and how risky a borrower you are. You cannot necessarily say what constitutes a ‘good’ interest rate across the board.

Given this, you may need to compare a range of products to determine what a good rate may be. Some banks and lenders may be offering a reasonable rate one week, and a not so good rate the next.

On top of this, if you are seen as a ‘less-reliable’ borrower and have to take out a ‘bad credit loan’, then your lender may apply a higher rate compensate for the additional risk.

Types of home loan rates: fixed, split and variable

When it comes to home loan repayments, you may be able to choose between different interest-rate types. In short, lenders may offer loans with either fixed, variable or split rates. See below for our quick explanation:

Fixed rates

If your loan has fixed interest rates on repayments, you will be paying the same interest over the whole loan term. This makes the repayments easy for you to budget into everyday life.

However, if the rates drop to something better than what you are paying, you won’t be able to benefit from this. Your loan will also be less flexible, and you will most likely have to refinance to change this.

Finally, keep in mind that a fixed rate on a home loan will only remain in place for between one and five years. After this, it will revert to the standard variable structure.

Variable rates

If you choose a variable rate loan, then your rate will fluctuate based on changes to the underlying factors it is calculated by. Therefore, if the interest rate is low, you are charged less than usual on top of your loan.

The downside to variable rates, however, is that if rates rise, you will need to ensure you have the cash to cover yourself. It is typically hard to predict precisely how long rates will be up or down for.

Split rates

The final option is a split rate repayment. Selecting this means you can combine aspects of both the fixed and variable repayments. You may be able to split it at whatever ratio you like. For example, maybe it’s an even fifty-fifty split, of perhaps you’d prefer a 20% fixed and 80% variable rate.

This enables you to have both confidence and flexibility with your repayments. Doing it this way means you won’t be as exposed to potential rate rises. However, you also won’t save as much as having a fully variable rate.

Finally, keep in mind that a split facility on a home loan will typically only remain in place for one to five years before reverting to a variable rate.

Loan to value ratio

The loan to value ratio (LVR) is key to many types of loans. Therefore, you must understand it and know how it affects you. In terms of home loans, the LVR predicts the value of your home as a percentage of the property’s value.

If you pay a larger deposit, then your loan to value ratio will be lower. To increase your chances of a successful home loan application, your LVR should ideally be 80% or less. If it is higher than 80%, you may have to pay lenders mortgage insurance (LMI). LMI is a one-time fee that protects your lender if they choose to lend to you. Sometimes, choosing to pay this LMI, rather than waiting to save up a larger deposit, can be ideal. However, it is subject to your situation, and you should speak with your lender about your options.

What is the principal payment?

Principal payments are any amount that you put towards paying off your loan. The principal cost excludes any interest you are yet to pay. Hence, if you are paying $600 a month on the loan, this is your principal. Interest is simply added on top of this, depending on the type of loan you take.

Interest-only loans

Interest-only loans are standard in the home loan sector. An interest-only loan works on the amount borrowed and means that your repayments only cover the interest for this. This means that you can set a period where you pay nothing on the amount borrowed. Therefore, the loan itself is not being repaid, only the loans interest.

So, why do people do this? Well, it may be an option if you are struggling due to circumstance to meet your repayments. Doing so is also useful if you are an investor, as it means you may qualify for higher tax deductions.

However, it may be worth keeping in mind that this will mean you pay higher rates than you would on the standard ‘interest and principal loan’. You also will not be touching the principal; the loan will be sitting there waiting for your interest-only loan to conclude. Having an interest-only period could also result in your repayments increasing at the end of this period, to stick with the original loan term.

types of loan going in different directions

Bad credit loans

Within the standard types of loans, there are options for people whose credit is not necessarily fantastic. Loans for bad credit are more common among personal and payday loans and could be an accessible choice for you.

When it comes to bad credit loans, your lender may evaluate more than your credit report. They may also assess your income, circumstances, saving habits, and whether you are receiving government assistance when determining whether or not to approve your application.

Keep in mind that if you find a lender offering guaranteed approval, it’s usually a good idea to avoid them. Make sure to run the appropriate background checks in this situation.

No credit check loans

No credit check loans are also in the same vein as bad credit loans. If you are confident that the lender is credible, then you can proceed with their services. No credit check loans do exist. Rather than requesting a copy of your credit report, your lender will instead go through the following:

  • Typically the last three months worth of your banking history,
  • Whether or not you earn a regular income, as this is essential to a no credit check loan,
  • And, they will also contact the credit bureau to inform them of your application.

If your application is not approved, it is best to give it some time before applying again to prevent further damage to your credit report.

Types of home loans

A home loan can be classed under all sorts of needs. For example, first home buyer, investment, owner-occupier, interest-only, construction, and refinancing, are all possible home loan classes.

Each type of home loan has its own features, fees and interest rates depending on what it will be used for and the applicant who is applying. There are also certain government schemes to help with some of these loan classes. For example, first home buyers may be entitled to the first home loan deposit scheme. This scheme is designed to get Aussies purchasing their first home sooner.

Find out more about the FHLDS with the National House Finance and Investment Corporation.

Secured vs unsecured loans

So far, the term ‘secured loan’ has come up quite frequently. But what exactly is a secured loan and how does it affect you? Well, applying security to a loan means that you are offering your lender one of your assets (that is important to you) to prove that you will pay the loan back.

Securing your loan tends to lower your interest rates, meaning if you make you repayments properly it can be a smart strategy. Depending on your lender, you may be able to secure your loan with:

  • Vehicles – including a car, motorbike, boat, or any farm machinery if you own it.
  • A cash deposit – if you don’t have a vehicle, another alternative is to secure with a term deposit or potentially an upfront cash deposit.
  • Assets of high-value – in some situations you lender could accept an expensive jewellery piece or high-value artwork.
  • Property – securing your loan against your property or property’s equity, is also quite common and is typically what happens with home loans. However, it can be done for other loans as well.

Student loans

In Australia, you would seldom see a bank to cover your student loans. This is as permanent residents can receive government help to cover the cost of university. This loan is not paid off until the student earns a certain amount annually.

In addition to this, government-funded loans for higher education don’t incur interest. Instead, they are indexed with inflation. As a result, you should prioritise other debts before making additional contributions to repay these loans.

Loans for people on Centrelink

It is important to recognise here that this is not a loan that is received from Centrelink. Instead, it’s is a loan for people on Centrelink. Also known as pension cash loans, Monzi may be able to find a lender who will work with you despite already receiving Centrelink payouts.

However, before applying for a personal loan on Centrelink, you should investigate alternative options. For instance, you may be eligible for a payment advance, allowing you to access a portion of your next payment early. Centrelink will then deduct this amount from your subsequent payments. If this is not an option, you may then consider applying for a personal loan.

Refinancing

Taking a new mortgage to repay an original loan is the concept of refinancing. The reason behind this is often to do with circumstance change or the realisation that your current loan is offering you a poor deal. Maybe you lost your job, and the new job doesn’t pay as well, so you would like a lower fixed rate. Alternatively, you may have gotten a better job and can now afford to switch to a variable rate and cover the flux.

When you choose to refinance, you may want to increase, decrease or maintain certain features or terms. Increasing your loan amount could help you consolidate debts, whereas decreasing your repayments could lengthen the loan term.

Regardless of your intentions, refinancing may enable you to get more out of your loan. You can also choose to remain with your current lender or swap to a new one.

Using a guarantor

A guarantor is a loan co-signer, or in even more casual terms, a guarantor is human security for your loan. If you don’t not qualify for your desired loan amount, you can ask a trustworthy family member to sign the loan agreement. Then, if you fail to make the repayments, the obligation to repay falls to your guarantor. Generally, this must be an immediate family member, not a friend.

Guarantor home loans can be especially beneficial in avoiding the lenders mortgage insurance. This is as they can offer some equity to make up your deposit. This is a way to get into the market sooner, rather than waiting to build up your deposit.

If you love your family though, you need to ensure you can stay on top of your repayments. This is as dumping a failed mortgage on your loved one is a pretty terrible thing to do. You also need to ensure that your guarantor is a homeowner, as they need to use part of their home equity to contribute.

Brokers

When navigating the loan environment, it can be helpful to have someone around who knows what they’re doing, if you don’t. This is where you can employ a mortgage broker or a stockbroker to aid you.

Brokers work on commission and if you have a decent broker they will understand your goals, create the best plan to benefit these goals, explain the process, and help you figure out what you can afford to borrow.

This can be very helpful if you are new to the world of loans. Just ensure that you make sure your broker is adequately licensed for their role.

Additional fees

There are some sneaky fees that accompany certain types of loans, excluding the already discussed LMI. Whilst the majority of these apply to home loans, some of them are also applicable to other types. Certain lenders will request application fees, whilst not huge they can be inconvenient.

You may also encounter fees for documentation preparations, property valuations, stamp duty, settlement fees, and refinancing fees. The list is long, and employing a broker may help to highlight which fees apply to you.

Lender-finders

Whilst not lenders themselves, the popularity of lender-finders in Australia is increasing. Essentially this means apply for a loan through a service that will match you with a lender who may be able to help you out with your loan.

Typically, lender-finder services are offered for personal and payday loans, and they work with private lenders rather than the mainstream banks. Using a lender-finder can significantly speed up the process of finding a lender who may offer the quick cash loans you need..

Who is Monzi?

Speaking of lender-finders, that’s us! We’re here to help find you a lender for various types of loans. Whilst, we can’t help you out with a home loan or a car loan, we can do our best to find someone to fund your personal loan.

You may use a personal loan to cover a variety of expenses. Even better, we’re 100% online and paperwork free. This means you can submit your application whenever you want. If you make this application within business hours, we may be able to find you a lender in as little as 60 minutes.

All you need to do is click that ‘apply now’ button and enter some necessary information to get the ball rolling.

Types of loans explained, now let’s be friends

Hey there, if you have any questions for us about our services or procedures, don’t hesitate to get in touch with our friendly staff at hello@monzi.com.au.

And, if you’d like to stay in the loop with us, why don’t you go check us out on our Facebook, Instagram, Twitter and Pinterest.

Factor In

Costs

Two credit cards
Two credit cards

You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

$2,001 - $4,600

Terms

13 months

24 months

Costs

48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months

24 months

Costs

21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Interest Rate for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.