Personal loans are a flexible way to get the cash you need quickly. But don't get tempted to start borrowing money straight away. Continually applying for loans could prevent you from gaining access to capital in future and bring down your credit score.
But that's precisely why we built Yonda — to help you get on top of all your financial behaviour. In this blog, you'll learn all about personal loans, how to apply and what to do if you don't have the best credit history.
What's a personal loan, anyway?
A personal loan's a great way to get money in your pocket, sort out unforeseen emergencies, pay for a long-term expense, or even fund something big, like a wedding or a holiday.
A personal loan is something you pay back in regular instalments over a set time. To begin with, you pay a starting cost — known as the principal — followed by some other fees and interest. The interest on the loan is charged at a set percentage based on the principal amount. This will usually be sorted upfront when you agree to the loan terms. After all, interest payments are how lenders make their money and why they advertise loans in the first place.
You could also use personal loans to consolidate existing debt. That means that if you have multiple loans for different things, you can pay them off by taking out one big new loan. That way, you've only got one repayment deadline to worry about, so you can easily track it as you pay it off.
Where do I get one?
There are many different lenders out there offering personal loans in New Zealand. They include banks, credit unions, peer-to-peer and payday lenders. A loan could even be money you've borrowed from family and friends.
Banks and credit unions usually charge the lowest interest rates and fees. Peer-to-peer lending (not from a bank) pairs borrowers directly with investors hoping to make some money off the transaction. Because there is no 'middleman' in peer-to-peer lending, you could find other deals that aren't available through other lending means. Make sure, though, that you use a P2P service that's licensed by the NZ Financial Markets Authority (NZFMA).
Are you considering putting your existing debt on your credit card or going to a payday lender? Before you do, consider this — credit cards and quick finance options like payday lenders charge high-interest rates, meaning you could run into some serious problems if you don't pay them off on time.
Some general tips.
Always make sure to shop around when looking for a personal loan. Don't quickly Google personal loans and accept the first thing you see. Consider the fees and interest rates involved and work out whether you can realistically afford the repayments as advertised.
Also — make sure that you borrow as little as possible and pay it back as quickly as possible. That'll cut down how much you have to pay in interest over time. Adding to your savings is almost always a better option than taking out a loan — although loans are there if you need them.
An important thing to note when applying for new personal loans in NZ is your credit score.
Why does my credit score matter?
Because it affects how much your loan costs.
Your credit score is based on your history of borrowing money and paying it back. It's scored using a numbered scale, with 0 being very bad, 1000 excellent, and 600-800 average to fair (we talk more about what this means in another blog). If your credit score is low, lenders will likely expect that you're someone who doesn't pay back your debts on time or on the whole — which means they'll be less willing to lend you money.
But if they decide to take you on as a borrower, they're going to want to make sure that the risk is worth it. That's why, if you have a low credit score, you're likely to face high-interest rates.
If your credit score is bad enough, you might find you'll have to extend the terms of an ordinary loan agreement.
Unsecured and secured loans if you have bad credit.
Borrowing when you have bad credit might be challenging, but it's not impossible. Some lenders may approve you even if it turns out you have had credit.
There are two main kinds of bad credit personal loans. Secured loans involve pledging (promising) something valuable — like your savings, car or even your house — as security against the loan. Meaning if you don't pay your loan back, the lender can offset their losses by taking the asset you pledged as security.
On the other hand, unsecured loans don't require you to pledge anything as security. But because the lender is at a more significant disadvantage (having no security if you don't pay back your loan), they usually charge higher interest rates to make up for it.
There are several options out there, even if you've got a bad credit score.
Firstly - talk to the experts. Meeting up with a budget advisor is a good idea. They can help you work out a plan based on your financial situation, give you advice on the best loans and even help you access low-interest loans through charities or Work and Income.
Take the time to work on building your credit score. Before taking out any loan, make sure you're borrowing only what you can afford — and try to borrow as little as possible.
Also, do your research. Most credit loans in New Zealand are advertised online, so it's easy to figure out the different costs on offer and find the best option for your needs.
By making regular repayments over time, you can build up your credit score, allowing you to switch out existing loans for ones with lower interest rates.