What should I know before applying for a loan?

Are you considering a personal loan? If so, you're not alone. Finance remains one of New Zealand’s most popular options for those looking to consolidate debt, finance a trip, or pay for much-needed home improvements.

So, where to from here? You'll need to gather together all the relevant documents, check your credit score, and compare providers to find the best option for you. We also recommend that you keep reading for extra information that will keep you informed and make the application process that much easier. 

5 things you probably didn't know about personal loans

1. Secured loans are held against your assets

Secured loans are a great way to access higher loan amounts as well as lower interest rates. These loans work much like a bond for a rental property: the individual offers up an asset - such as a boat, car, or home - which is then used as security for the loan.

Unlike an unsecured loan, this security increases a prospective lender’s confidence in you as a borrower, as they know they’ll be compensated should you fail to make the agreed payments. In turn, they’re more likely to approve your application, for a higher amount, and at a lower rate.

2. The lowest rates are reserved for Kiwis with good credit scores

There’s never been a better time to nab a great rate on your borrowing, though it’ll still require some work. You see, you ability to land a low interest rate is as dependent on the lender as it is your own personal finances and your credit score.

Your credit score does affect your personal loan application, as it’s the easiest way for future lenders to measure your application. A bad credit score raises red flags that you’re a riskier customer, so lenders will compensate with higher rates and lower lending amounts. While many financial institutions do offer loans for Kiwis with bad credit, you’ll still pay more.

Before applying, you should improve your credit score, whether by making bill payments on time, keeping credit card balances low, or paying off your debts. This might take time, but in return you’ll save money.

3. The longer the term, the more interest you’ll pay

It’s no surprise that you’ll have to pay back the money you borrow someday, but the amount you pay each month depends on how much you borrow, as well as the length of time you borrow.

The longer the term, the smaller your monthly repayments will be, but the more you’ll end up paying in interest over the life of the loan. On the flip side, a shorter term will see you paying more each month, but less in the long run as you’ll pay less in interest.

This is why it’s crucial that you don’t just budget for the minimum repayments: you should also consider the length of the loan and whether you can make the repayments.

4. Lenders all charge different rates & fees

Interest rates are an easy way to judge a loan’s quality, but it’s not the only thing you should consider. While low rates may grab your attention, you should check the fine print too. Do you know if the lender plans to charge you for making additional repayments? Will you have to pay a fee for paying it off early?

Banks, credit unions, and peer-to-peer lenders all boast different fees and charges, so double-check the fine print before you sign on the dotted line. By checking the details now, you’ll save yourself a whole lot of hassle down the line when you’re hit with fees and charges you didn’t see coming.

5. A guarantor could land you a better interest rate

Your credit score has a big impact on your ability to access lower interest rates. While there are many ways to improve your credit score, these all take time. If you don’t have the time to spare, then you could ask a friend or family member to act as a guarantor on your application.

A guarantor essentially holds joint responsibility for you paying back your borrowing, should you fail to make the required repayments, or otherwise find yourself unable to repay the loan in full. In the eyes of the lender, they’re able to split the risk across two individuals, rather than one, meaning they’re more likely to receive their money back, even if something bad were to happen.

Having a guarantor on your application can increase your chances of being approved, and can even result in a reduced interest rate. Do note that in doing so, you put the guarantor at risk, should you find that you’re unable to make your agreed payments. So while it’s an option, it’s one that requires thought, consideration, and discussion with any potential guarantor.

Want to know your options?

Try our personal loan calculator.