Step 1 - Why take out a personal loan?

Australians owe over $100 billion in personal lending; approximately 55 percent as revolving credit and 45 percent as fixed loans.

The loan may be secured (meaning that you give the lender security over one of your assets) or unsecured. Either way, personal loan interest rates are traditionally lower than credit cards. The loan can be taken out for any number of reasons - paying for an upcoming holiday, buying a new car or furniture, or even to cover education fees. Generally the loan will tend to be for a specific purpose.

For larger expenses, a personal loan can be a more cost-effective form of borrowing than a credit card, partly due to having a lower interest rate and partly due to having a fixed loan term.

Personal loans suit borrowers who wish to purchase large-ticket items, such as furniture or an overseas holiday, but lack security (for example, young people who rent).  They also suit people who want to consolidate their debt and put in place a fixed repayment plan over a certain amount of time (usually one to five years).

Step 3 – Getting the best deal

Most banks and credit unions offer personal loans so with any luck you may be able to negotiate yourself a good deal.

The first thing to do is get a copy of your credit rating http://www.mycreditfile.com.au to ensure that there are no nasty surprises. With a clear credit rating you can promote yourself to the lender as a reliable customer!

Next, do some research. Personal loans are a competitive area, so check out on-line comparisons of lenders’ rates on websites such as Canstar.com.au and infochoice.com.au. Be aware of the difference between the base interest rate (being purely the interest charged on the loan) and the comparison interest rate (which is the interest rate plus other fees and charges payable). The comparison rate is a more useful way to judge the likely costs of a loan.

If you have an asset such as car or caravan that you can use as security against the loan you will most likely be able to attract a lower interest rate.

Lenders will negotiate the lowest rate with good customers – but sometimes you have to ask. If you do have a home loan, consider adding the personal loan to a line of credit loan, making sure it does not become a honey pot for overspending.

Step 4 - Get the best fit

The loan which suits you best will in part depend on your future cashflow.

If you believe that you will be able to make extra repayments, then go for a variable rate loan that will allow you to make extra payments, reducing the interest paid.

On the other hand, if your cashflow is tight then fixed interest rates give repayment certainty over longer periods.

Step 5 – Be aware of the new Consumer Credit Code

The government has recently introduced a new Consumer Credit Protection Bill. This new code governs all credit transactions taking place in Australia, including personal loans. As such you now have the same standard coverage wherever you live, a great initiative which provides greater protection to consumers. You can read about the Consumer Credit Code at www.creditcode.gov.au.