Save big bucks by repaying loans early

Save big bucks by repaying loans early

CANSTAR releases personal loan star ratings report, researching 19 products from 9 providers to determine those which offer outstanding value for consumers.

There’s no doubt personal borrowing underpins a household’s wealth and lifestyle ambitions. Money for everyday items, as well as cars, holidays and more is nearly always obtained through personal debt in the form of personal loans and credit cards.

According to the Reserve Bank, consumer loans have been creeping up, with the amount of consumer lending increasing by $1 billion over the past two years, to a current total of $14.4 billion. This figure doesn’t include home loans.

Whether you are borrowing for a car or other big-ticket item, or consolidating debt that’s gotten out of hand, it’s still a costly business. Repaying the debt can sometimes be a stretch, particularly if life throws you a curve ball such as job loss, accident or illness, but repaying as early as possible can save you a lot of money.

“It’s a win-win situation if you put extra money into your personal loan. You will slice the time it takes to pay off the debt and save yourself a bundle in interest at the same time,” said CANSTARGeneral Manager – New Zealand, Derek Bonnar.

“Our calculations show this clearly when you borrow $10,000 over seven years. By sticking to the set monthly repayment of $210, you will have paid nearly $7,685 in interest after the full term. However, if you put an extra $45 per month into the loan, you’ll shorten its life by two years and save yourself over $2,400 in interest.”

Interest savings from early repayment of an unsecured personal loan

Source: CANSTAR. Assumptions: Total Interest Paid is based on monthly repayments made over the term of the loan on a $10,000 loan amount at the average interest rate for Unsecured Personal Loans. Fees and charges not included.

According to CANSTAR, when considering a personal loan, think carefully about a loan term that would best suit you and your purpose.

“Cut the term short and you may find yourself struggling to find that larger amount of money each month,” Mr Bonnar said. “On the other hand, if you spread the loan over too long a term, you’ll pay more interest overall and, chances are, the car you are paying off won’t be worth that amount of money at the end of the loan term.”

“With regards to purpose, personal loans can be great for consolidating debt because a personal loan does something a credit card does not: it takes away temptation,” Mr Bonnar said. “You cannot keep spending with a personal loan. A series of monthly instalments mean you are locked in to repaying the loan in full by the end of the term. For some people who can’t trust themselves to keep their credit card in their wallet under all circumstances, this is the sort of discipline needed to erase their debt in full. Of course, remember to cancel your credit card so that you don’t add to your debt all over again.”

Interest rates should also be a determining factor. As shown in the chart below, there is quite a spread between the lowest and highest rates charged in all three personal loan categories assessed by CANSTAR. That’s why it’s all the more important to use the CANSTAR personal loans star ratings as a shopping guide before deciding on the loan that’s right for you.

Interest Rates for Personal Loans

Source: CANSTAR personal loan star ratings, October 2014

“Looking at the spread between minimum and maximum interest rates on debt consolidation loans – 13.82% to 22.99% - it’s obvious that choosing the wrong debt consolidation loan could be costly,” Mr Bonnar said.

Which institutions offer outstanding value?

CANSTAR assessed the personal loan products on offer from nine providers, across the categories of secured, unsecured and debt consolidation. The following institutions received a five star rating:

Secured personal loans
• Co-operative Bank
• TSB Bank

Unsecured personal loans
• TSB Bank
• Westpac

Debt Consolidation loans
• ASB Bank
• TSB Bank

In its personal loan star ratings report, CANSTAR evaluated 19 products from 9 providers and awarded five stars to those offering outstanding value through a mix of the best rates and features. Click here to read the report.

ENDS

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