Loans broadly fall into two categories. Secured Loans and Unsecured Loans. A secured loan is where you have offered a security (a house, stocks, a business) as collateral such that the bank can call on this asset to repay the loan in case of default. An unsecured loan is, as the name suggests, the opposite where you are offering nothing as security except for your own personal profile, credit history, and ability to service and repay the loan + interest.
There are many different types of interest repayment terms to consider. Variable Rates, Fixed Rates, Discounted Rates, Comparison Rates, etc.,
A Fixed Rate is where the interest repayments are fixed on a certain amount for a fixed duration (eg. 1 year, 3 years, 5 years) regardless of the market movement on interest rates. This can provide a level of security against rising interest rates and a sense of comfort that you will always be able to pay that amount. On falling interest rates though, this can be an issue for some as they have locked in a higher rate. If the difference between your fixed rate and the lower prevailing interest rate is significantly high it may be worthwhile to investigate on the costs of refinancing your loan to take advantage of the new rates. Often though, it is not financially sensible to exit a fixed loan as the exit fees make this extremely costly.
A variable rate is where the interest rate is floating and subject to what the bank is charging at each period. It may sound scary as you are at the banks mercy in terms of what they choose to change the interest rate to in the future. In practise though, it is not as scary as the major banks will look to continue to offer competitve market rates to attract customers. The advantage of a variable rate is that you can take advantage of falling interest rates and the fees for early repayment are insignificant when compared to ending a fixed rate loan early. Because of this you also have the option of switching to a fixed rate loan in the future.
Fixed and Variable Rate loans have their own advantages and disadvantages and it really depends on your own circumstances and risk adversity when it comes to choosing which type to opt for. One way to hedge your bets is to split your loan between the two. Eg. Have half the loan as fixed and half the loan as variable.
There are many other factors to consider in loans, other than the interest rate. Is there an offset account? An offset account means that you can put money into this account and it will act as lowering your loan amount (without actually paying off your loan). The net effect is a lower interest repayment amount for the time you have money in the offset. Many banks provide 100% offset accounts which means 100% of the money you have in the account is used to offset the same amount in your loan. Eg. If you have $50,000 in your account and your loan amount is $200,000. You will only be paying interest on the $150,000. The advantage of this is that you have lowered your loan amount without actually paying it off. This means you still have access to the money for when you need it and you don’t have to redraw on your loan.
Some loans that do not have an offset account facility will have a redraw facility. This means that you can take money out of your loan when you need to. Often there is a fee for each redraw or you may be limited to a certain number of redraws per quarter or per year.
Setup Fees, Servicing Fees, Introductory offers, Repayment Frequencies, Special Offers, Bundled Offers, Free complimentary gifts, and discounts are other aspects of loans to compare. You need to look at the total package of the loan, compare them side by side, and see how they stack up. Is it worthwhile to go with the smaller bank for their lower interest rate or will you sacrifice a bit on interest for the added security and features of the larger bank loan? These are questions that different people will answer differently depending on their own personal circumstance.
Make sure you search online for the best deal that is right for you. Compare at least three lenders before choosing to sign on the dotted line for that loan.