Choosing the cheapest personal loan

Personal loans are available through banks, credit unions, peer-to-peer and payday lenders, and loan shops. People use personal loans to pay for all kinds of things – weddings, renovations, holidays or consolidating their debts. But borrowing from some lenders can cost us dearly, so we need to research the options and know what we're getting into.

Know all the options

Family and friends

There are many different lenders to borrow from but the cheapest option could be family, friends or even your employer.

Banks and credit unions

If friends or family can’t help, the next best option is to approach your bank or a credit union for a personal loan.

Banks, building societies and credit union interest rates are often lower than those offered by other lenders and they often charge fewer fees.

Credit cards

You can borrow money on credit cards (called a cash advance), but the interest rates are usually higher than for personal loans. Repayments can quickly get out of hand if you don’t clear the balance each month.

If you’re in a hurry to buy something it can be tempting to use hire purchase, a store card, or ‘line of credit’ cards offered by finance companies. But interest rates can be high and there are often large establishment fees and insurance to pay.

If you get behind in your payments the finance company may repossess things you value.

Find out more about repossession and debt collection on the Consumer website.

Peer-to-peer lenders

P2P services are typically websites that match borrowers with investors who have money that they want to put to work. Since these sites can sometimes reduce their costs of offering the service, they may offer better deals to both borrowers and investors. So lower interest to pay for borrowers, higher interest to earn for investors. This means there could be good opportunities  to borrow money (cheaper than a credit card, for example) or invest it (earning a better return, perhaps, than a term deposit).

The key is to use a peer-to-peer service that’s licensed by the Financial Markets Authority, so you know they’ve been checked, have systems for screening borrowers, follow rules around presenting information and have a process in place for handling complaints and disputes.

Loan shops

If you’re in urgent need of cash a local loan shop can seem tempting. However, their interest rates can be very high.

Loan shop staff will often talk of repayment as so many dollars a week, rather than focusing on the total you will pay back over time. They should tell you the total cost of the loan and clearly state the actual interest rate so that you have all the facts to compare.

It pays to avoid lenders that charge very high interest rates – especially if they’re offering money door-to-door and don’t have an office. These lenders can include ‘loan sharks’ who may use heavy-handed techniques to make people pay up.

Loan sharks often charge interest by the week on ‘payday’ and people can easily end up paying many times what they borrowed. It's common for interest rates on these types of loans to be several hundred percent each year.

Ask for help

If you need money urgently to cover basic costs, contact Work and Income to see if you qualify for a hardship grant, or speak with a local financial capability (budgeting) service. They will be able to suggest a range of options to help.

Using a mortgage

If you own property you can usually get a cheaper loan secured against your home from a bank or other lender. Keep in mind that if you fall behind with payments you risk your home being repossessed.

With a revolving credit home loan you can borrow money against your house any time you need it, if you have balance available and as long as you stay within the original agreed terms and limit of your loan. This kind of credit only works if you’re disciplined about making repayments, and shouldn’t be used for day-to-day expenses.

If you do use a mortgage to borrow against your home, try to payoff  the additional loan over as short a time as possible. Even if the interest rate is lower, you’ll end up paying more in the long run if your loan is spread over the whole term of your mortgage.

Guide to different types of mortgages

Find the best interest rate

Interest on personal loans can make them an expensive way to get money. Shopping around usually means paying a little less.

It's easy to check interest rates online on the website.

Check the fees and charges

To find the best personal loan we need to know the fees involved, as well as the interest rate. Add up the total costs and see how long it would take to get out of debt with this debt calculator. 

Many personal loans have establishment or documentation fees that can be more than $100. Store cards charge for replacement or additional cards, or to reprint a statement. We could also have to pay a fee to change the repayment terms, and if we don’t pay on time we'll be charged default fees.

If these fees are all rolled into the loan we'll pay interest on them – as well as the loan amount. 

Banks may also charge fees if we exceed the agreed amount available to us in our account.

Top tips for managing personal loans

  1. It’s good to always ask – do I really need to borrow the money? Could I wait a bit and save instead?
  2. Use the debt calculator to work out what the loan will cost each month and in total.
  3. Understand all the fees that may be charged – and avoid nasty surprises!
  4. Be careful borrowing from lenders who take personal property as security. If you get behind in payments they could claim some of your household goods.
  5. Know when payments are due and make sure there’s money in the bank account to cover them.
  6. Rather than borrowing money for household basics, get free debt counselling from a local financial capability (budgeting) service.
  7. Avoid being a ‘guarantor’ for other people’s loans. If they don’t pay, you will have to.


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