Borrowing Money*
Australian loans and finance approval* can be daunting and challenging when you are new to Australia for permanent residence visa holders and even more so for provisional (or temporary) visa holders as credit in Australia is no different to most other developed countries as usually relies on credit ratings and credit systems (computer programs that finance assess risk). It is also a challenge as many “loan officers” at banks and other financial institutions don’t understand the various visa categories, their restrictions and the average skills, experience and earning power that migrants represent. There is also often a lack of understanding of the extensive checks that are conducted on individuals as part of the visa application process.
Many banks will generally give a credit card to skilled migrants (even those on 457 visas) and some even provide them to international students (as long as you meet the relevant financial institution’s lending criteria), they can often not be as forthcoming with personal loans or other finance products. Some of the banks also do not offer secured loans for cars (and other asset finance) unless it is for business purposes, this is often exploited by car dealer finance managers who write their loans at higher interest rates for unsuspecting migrants.
ASIC (the Australian Investments and Security Commission), has an excellent website called MoneySmart that has lots of useful information on the different types of loans, credit cards, and all things to do with credit (finance) as well as useful calculators to assist you with budgeting and affordability. They also have information on scams and credit ratings (reports) and your rights as a consumer. It is definitely worth visiting the MoneySmart Website before you start the loan application process.
There are alternatives and brokers who can potentially assist you with various loan products and one possible option is covered at the bottom of this page.
Secured Loans (for cars and other assets)
This type of loan is given to finance a specific purchase (e.g. a car) and the finance company or bank takes a security (or charge) over the asset being purchased until the loan has been repaid to the finance company in full or the asset is sold and the finance paid back to the finance company in full. The borrower signs a loan agreement with a finance company (or bank) for a fixed term of 1 to 5 years (5 years is common) which is an agreement where the lender lends the borrower the money to buy the car and in return, the borrower agrees to pay the lender a fixed monthly amount for the loan term until the car is paid off. These types of loans are usually fixed interest rate loans, meaning that the monthly repayments stay the same for the period of the loan. They usually have a lower interest rate than unsecured personal loans and can be for higher amounts than unsecured loans as the finance company (lender) has security (the car or asset being financed) that they can sell if the loan obligations aren’t met. If the borrower stops making payments then the finance company can take the car and sell it to recover their money.
Secured loans can sometimes have a balloon or lump sum payment at the end of the contract, this means that the monthly repayments are reduced, as the borrower only repays a portion of the loan for a fixed period and then at the end of the loan term they either have to repay the lump sum, sell the car and repay the outstanding amount or refinance the balloon payment with another loan. Whilst these loans have lower monthly repayments, they charge higher interest as interest is accrued on the balloon payment as well as the annual rate on the monthly repayments.
Tip: When comparing loans, one method to check how much interest is payable on a loan, is to add up the repayments for the loan term. For example, a $30,000 loan for a car over 5 years, may be quoted as monthly payments of $625 per month at a (fixed) interest rate of 9%. This would mean that a borrower would repay $37,500 over the 5 year period, or approximately $7,500 interest and loan fees.
A comparison of the same loan at the same interest rate with a $9,000 (30%) balloon payment: the monthly repayments would be $504, and the total repaid (including the balloon payment at the end of the 5 year loan period) would be $39,504 – an additional $2,000 (approximately) in interest.
Unsecured Loans
These are loans where the loan is provided without any security for the lender, they tend to be for lower amounts and attract higher interest rates than secured loans. It can also be more difficult to gain approval for higher amounts (e.g. to buy a car) as represent higher risk to the finance company or bank (they don’t have any asset they can sell where the borrower stops making payments).
Personal loans are most commonly offered by banks and other financial institution, though these are also used by department and other stores to assist in the purchase of furniture and household effects. They are also the loan product when stores advertise “interest free” purchase loans.
Warning: Interest free loans are generally offered for a fixed period and are based on full repayment of the loan within the contract period. Where the loan is not repaid within the interest free period, interest is charged a a high rate (for example, >20%) for the entire period and becomes effective the day after the interest free period expires.
The Australian Securities and Investment Commission’s (ASIC) website, Moneysmart has an Interest Free Deal Calculator as well as FAQ’s on the interest free deals and how it all works.
*PLEASE NOTE: The information provided on loans and getting finance above should be regarded as general factual information only and does not constitute advice on loans, getting finance or any other advice in any form. Move to Australia does not provide any finance or financial products or services and is not licensed to provide general or personal financial advice and does not hold an Australian financial services licence. You should seek authorised advice from a suitably qualified and regulated Australian financial services (AFS) licensed company and/or individual before making any borrowing decisions. Move to Australia, MovetoAus.com.au and its directors take no responsibility for the accuracy of the information provided.
