Loan types in NZ: how to compare personal loans

Loans look complicated because lenders use terms that mix up two separate questions: what backs the loan, and how the interest is priced. Separate those and every product on the market becomes readable. Borrowing power is the other half of the story, and you can see how lenders work that out in our guide to how much you can borrow, or run the borrowing power calculator.

Secured vs unsecured

This is the single most important split, and it decides the rate on offer.

• A secured loan is backed by something you own, usually a car or another valuable asset. Because the lender can take that asset if you stop paying, it treats the risk as lower and usually offers a lower interest rate and a larger limit. The cost is the risk: miss enough repayments and you can lose the asset.
• An unsecured loan has nothing backing it. The lender has no right to a specific asset, so it treats the loan as higher risk. In practice that means a higher interest rate and often a smaller amount. On the other side, there is no asset at stake beyond your credit history and your income.

When a lender approves a secured loan, it wants reassurance about the asset. An unsecured lender is really worried about your income, your spending and your repayment history. That is why a secured quote can look cheaper on paper, and why the two should never be compared side by side as if they were the same thing.

Fixed rate and the fee that goes with it

Most personal loans carry a fixed interest rate for the whole term. Your repayment does not change from month to month, which is the point of picking one. You set the budget once and it holds until the loan is paid off.

Because the rate is fixed, there is usually an establishment fee charged up front, and often an early repayment fee if you clear the loan ahead of schedule. The lender has priced the deal on the loan running its full life, so settling early can trigger a cost. It is worth asking exactly what that fee is before you sign, not when you are trying to get out.

Interest types: how the real rate hides

This is where a loan can quietly get expensive, so read closely.

• Interest on the balance remaining. Some lenders calculate interest only on what you still owe, so the amount shrinks as you repay. This is the standard on most personal loans and credit products.
• Interest priced against the original amount. Others price interest on the full original amount for the whole term, whatever you still owe at the time. On these loans the effective rate you pay is higher than the advertised rate, because you are paying interest on money you have already handed back.

The honest way to compare any two loans is the effective interest rate and the total cost over the term, never the monthly payment on its own. A suspiciously low monthly figure usually just means a longer term spreading the same total over more months. Rates change with the market and vary by lender, so compare on the same term and the same type of loan, not on one headline number.

How loans fit with the other ways to borrow

A personal loan is not the only option, and it is not always the right one.

• Credit cards are revolving credit you can spend up to a limit and repay in flexible amounts. Convenient, but they tend to carry higher ongoing interest, and the flexibility can become a bill you never quite clear.
• Buy now pay later splits a single purchase into instalments, often interest free for a short window. The catch is late fees and the habit of stacking several purchases at once.
• Car loans and home loans are secured against a specific asset, which is why their rates can sit below an unsecured personal loan. If you are paying down several debts, our guide to which debt to pay off first is the place to start, with a debt payoff calculator to see the difference a little extra makes.