Types of loans

Loans come in families, and each family has its own typical size, rate and rules. Knowing the map means that when you eventually need to borrow, you can reach for the right kind instead of the nearest kind.

The main families

• Personal loans: a few thousand to around fifty thousand dollars, for cars, renovations or consolidating other debts. Secured versions cost less, unsecured versions cost more.
• Car loans: personal loans where the car itself is the security. If repayments stop, the lender can repossess the car.
• Home loans: the largest loan most people ever take, secured by the house, repaid over up to 30 years. Because the security is strong, the rates are the lowest of any consumer loan.
• Student loans: in Australia this means HECS HELP. It is interest free, but the balance is indexed, meaning it is adjusted over time so it keeps pace with costs. You repay through tax once your income passes a threshold.
• Payday loans: small, fast and severely expensive. Covered in the previous lesson so it does not need repeating, except to say: last resort, and usually not even then.

Two shapes: instalment and revolving

Underneath the family names, loans come in two basic shapes. Most are instalment loans, where you borrow a set amount once and pay it down over a fixed term until it reaches zero, like a car loan or a home loan. The other shape is revolving credit, where you get a limit you can borrow against, repay, and borrow against again, with a credit card the everyday example and many buy now pay later accounts working the same way. Revolving credit is convenient precisely because it never quite ends, and that is also its danger, since a balance you can keep topping up is a balance that can quietly sit there for years, charging interest the whole time.

Where you get them matters

The same $12,000 car can be financed through a bank, a credit union, an online lender or the dealership selling the car. Dealer finance is the most convenient, arranged in the same room where you fell in love with the car, and that convenience is often expensive: higher rates, establishment fees and monthly account fees are common. Licensed lenders in Australia must follow responsible lending laws overseen by ASIC, which require them to check a loan suits you. The laws are a floor, not a guarantee of a good deal.

Reading a loan ad

Loan advertising in Australia must show a comparison rate alongside the headline rate. The comparison rate folds most fees into a single percentage, so it sits closer to the true cost. A loan advertising 7% with a comparison rate of 10% is telling you, in small print, that fees add roughly another 3% a year. Always compare loans on the comparison rate, never the headline.

One offer deserves special suspicion: 0% interest. Sometimes it is genuine, a real deal for a set period. Often it hides its cost elsewhere, in a higher sticker price, a large fee to set it up, or a rate that jumps sharply the day the introductory period ends and applies to whatever balance is left. The comparison rate is built to drag these costs into the light, which is why you compare on it and read what happens when the 0% period finishes.

What this looks like in your life

The first family most students meet is revolving, not instalment. A buy now pay later app sets a limit, and every purchase quietly draws on it. It feels nothing like signing for a car, but it is the same machinery, and the habits you build with it are the habits you will carry into bigger loans later. Learning to see the shape of the credit, instalment or revolving, secured or unsecured, is a skill that costs nothing to practise now and saves real money once the numbers get large.

The next lesson turns to the questions worth answering before you sign for any of these, and the interest lesson explains why the rate gap between the families is really a gap in risk.