Most personal finance experts agree that it’s best to avoid debts, but there are some expenses that make taking out a loan seem like the best option.
Benefits of getting a loan
Consider the benefits below when deciding whether to apply for a loan or not.
- Many institutional and alternative lenders offer loans
There are many ways you can access a loan if you decide to apply for one.
Financial institutions, such as banks, not-for-profit organisations and even alternative lenders all offer a variety of loan products with different terms and conditions.
You simply need to practise due diligence in order to secure a loan with a reliable and trustworthy lender. - Terms may depend on your eligibility and capacity
The government requires loan providers to be responsible with their lending. In line with this, lenders scrutinise loan applications and may adjust the terms of a loan.
The allowed loan amount may increase or decrease depending on how eligible you are. Likewise, lenders scrutinise how financially capable you are of repaying the loan based on past and present financial circumstances - Interest rates may be lower
If you have a good credit score and a stable income, you may be eligible for lower interest rates – especially when compared with credit card rates.
This is beneficial if you have a variety of expenses to cover because the total amount you repay won’t inflate from interest. - There’s no “credit limit” to the amount you can apply for
You can apply for the full amount you need whether you require $10,000 or $100,000.
The only limit to the amount you can ask and get approved for are your own eligibility and creditworthiness. - It can be used for debt consolidation
Taking out a loan can be a good alternative to opening a balance transfer or debt consolidation credit card or account.
With balance transfer cards, a higher interest rate may be applied to your balance if you don’t repay the full amount of your consolidated debt within the interest-free period.
But with a single low-interest loan to pay off other debts, you’ll know how much you need to pay each period without worrying about getting hit with a higher interest later on. - You can get one even with a bad credit score
Some lenders offer loans even to people with bad credit score, so you still have options worth considering if you’re badly in need of a loan.
The downside to this is that these types of loans usually have a high interest rate and more restrictions when compared with loans for people with good credit scores.
When is interest on my loan tax deductible?
Both principal and interest portions of loan repayments are not tax deductible, except in very limited circumstances.
The Australian Taxation Office will only allow you to deduct interest payments on your loan if the borrowed money was used to gain assessable income. However, you must have used the money to increase your own assessable income or for your personal education.
This means that you may only apply for a tax deduction on interest payments if you used the borrowed money for any of the following:
- Personal education (i.e. student loan interest)
- Business expenses
- Investments for your personal portfolio
This exception does not apply to you if you gift the loaned money to help someone else with their education or to obtain the means to acquire or increase their assessable income.
Are loans good for the credit score?
Loans are only good for building up your credit score if you can consistently make repayments in full and on time.
Falling behind on payments or defaulting on the loan will negatively affect your credit score.
How to secure a loan with no credit rating
It won’t be easy to secure a loan with no credit rating, but it’s possible through guarantor loans or by putting up a collateral.
Explore nestegg to know more about loans.
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We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians
Your email address will be shared with nestegg and subject to our Privacy Policy
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