The pros and cons of personal loans, car loans, debt consolidation loans and commercial loans
The COVID-19 pandemic brought financial hardship for many people, while others used the opportunity to launch new ventures.
As a result, loans reached record highs.
But these figures don’t tell the whole story.
For example, 4.6% of Australians paused credit card or personal loan repayments during the pandemic.
When times were tough, the flexibility afforded by finding the right loan gave thousands of Australians a breather.
So how do you find the right loan for your lifestyle and financial goals?
It starts with understanding the types of finance available and what they’re typically used for.
The four common types of loan
1. Personal loans
Personal loans are used to finance everything from new furniture to holidays, whitegoods to home renovations.
You can also secure a personal loan as a cash injection.
There are generally two types of personal loans:
- Secured loans: There is collateral attached to your loan (for example, a home or car), so the lender can recover the outstanding debt if you default on the loan.
- Unsecured loans: You don’t need collateral for unsecured loans; however, the interest rate is often higher, and the borrowing cap is lower.
A common question that lenders like Australia’s Yes Loans receive is: what’s the difference between payday and personal loans?
Short-term payday loans have higher interest rates, can damage your credit score and reduce your chances of being approved for financing in the future.
On the other hand, taking out a personal loan through a reputable lender is often more flexible, potentially helping you remain financially secure without becoming trapped in a dangerous debt cycle.
2. Car financing
Car loans are a variation of personal loan used specifically to purchase a vehicle.
Business owners and contractors can also take out car financing for a commercial vehicle.
However, we will focus on personal car financing here to keep things simple.
Car loans are typically secured by the vehicle itself (see “Secured loans” above for a refresher).
Secured loans generally have favourable interest rates and often a higher cap on how much you can borrow.
If you are buying a new or used vehicle, you have a couple of car loan options:
- Dealer financing
- Independent lenders
- Bank loans
Dealer financing is simpler, but the interest rate is often higher, either right away or after a fixed period at a low rate..
It is always worth shopping around to compare interest rates and repayment terms.
3. Debt consolidation loans
As personal debt levels rise worldwide, many people unwittingly find themselves overwhelmed by juggling multiple loans.
Debt consolidation loans combine outstanding debts to make repayments simpler.
For example, you may have taken out dealer financing at a high interest rate, plus a personal loan for vehicle modifications, while still paying off a personal loan used for home renovations.
You may be able to take out a debt consolidation loan that combines all these loans and simplifies your repayments at a lower (single) interest rate.
Consolidating loans should always lower your repayments.
If the debt consolidation loan results in higher repayments, continue shopping around until you find the right lender.
4. Commercial loans
From start-ups to SMEs, cafés to contractors, growing businesses often reach a point where they need to choose between a commercial loan or cash injection from shareholders.
Commercial loans let business owners maintain their independence while providing the funds to grow.
Small, medium, and growing businesses use commercial loans for all kinds of things:
- Purchasing new equipment
- Starting a business
- Company cars, trucks or fleet vehicles
- Opening a new storefront
- Computers or tools
Banks offer commercial loans, but any small business owner knows how frustrating and slow that process can be.
An alternative option is to secure a commercial loan through an independent lender who offers fast approval and flexible repayment terms.
Provided, of course, the loan is right for you.
Which loan is right for me?
Personal loans, car loans, debt consolidation loans and commercial loans can all kick-start a new venture or help get your finances on track.
However, only you can decide which type of loan suits your lifestyle, repayment capacity and risk appetite.
And then there are considerations like interest rates, early payout terms and repayment deadlines.
Every financial decision should be made carefully.
Consider the pros and cons and, if possible, seek an accountant’s advice before taking out a loan.
That way, you can escape the debt cycle and get life-changing finance at a competitive rate.