Comparing Loans: What to look out for

With so many loan options and an increasingly complex market, it can be hard to pick the best loan for your needs. There are many different factors to consider when it comes to choosing loans. In this article, we outline the features you need to look out for when comparing loan options.

The Loan Type

There are a number of different types of loans, each having distinct features. If you’re applying for a home loan, for example, you can choose from the following:

• Basic loan: a loan with affordable rates and minimum features.
• Standard loan: a loan that offers more flexible features than a basic loan at higher rates.
• Home loan package: a combination of standard loan and other financial products, usually a transaction account and/or a credit card.
• Line of credit loan: a loan that provides you access to funds whenever you need a certain amount. Similar to a credit card.
• Low doc loan: loan plans that require minimum documentation on the borrower’s part.
• Interest-only loan: a loan that allows you to pay only the interest, rather than both the interest and the principal (borrowed) amount, for a maximum period of five years.

The Interest Rates

When it comes to interest rates, low figures shouldn’t be your only consideration. You should also think about:

• Fixed vs variable rate: A fixed rate loan provides a stable rate throughout your loan term, while a variable rate loan allows you to have more flexibility in your repayments. You can also try a split home loan, where you can have one part of your loan fixed and the other fluctuate with the market.

The Comparison Rate

The comparison rate is one of the most useful tools borrowers can use to compare different loan products and discover their true costs. It recalculates the listed interest rate to take into account the extra fees and charges. If the comparison rate is close to the interest rate, it means that the loan has minimum upfront and/or ongoing fees. However, beware that some comparison rates might be “polished” not to include variable fees. This brings us to…

The Fees

Regular fees, establishment costs and exit fees can make a big difference to the repayments you’re obliged to make and the amount you can save. Don’t be afraid to ask your broker about all the charges associated with the loan, including but not limited to:

• Upfront costs: application fees, valuation and legal fees, establishment fees, Lender’s Mortgage Insurance, stamp duty.
• Ongoing costs: monthly or annual fees, administration fees, redraw fees, extra repayment charges.
• Exit fees: early exit fees, break fees, discharge fees.

The Features

The more features you have, the more you can customise your repayment plan. These may include:

• Redraw facility
• Repayment holidays
• Offset accounts
• Portability

Keep in mind that these perks come at a cost – in general, a loan with features will be costlier than its no-frills counterparts.

Need help with comparing loans? Call us to discuss your options.