Personal loans can be a cheaper alternative

In our complex world the demands on household budgets are many. But the sheer simplicity of personal loans makes them an ideal choice to fund a variety of projects.

Life used to be simple. A car, an annual vacation and a new appliance were the key 'big ticket' items most households faced, and for these we usually turned to a personal loan. These days the bills can be quite different. Kitting out a nursery, meeting private school fees, or even taking a sabbatical to boost tertiary qualifications are just some of the projects households need to fund. Once again, personal loans can provide the solution.

The appeal of personal loans lies in the fixed term and the clear upfront rate - a cost that is often substantially lower than credit card rates.

But it's the sheer variety of purposes that personal loans can be used for that make them worth a re-think.

With a growing number of families opting for a private school education, a personal loan can bridge the gap between an education savings pool and school fees that can outpace inflation.

Further down the track, when the small fry have moved on to tertiary studies, personal loans can be a useful way for cash-strapped uni students to fund their education costs. For financially inexperienced young people, the spending limit and set repayments of a personal loan can be a financially far safer option than a credit card.

And while homeowners often extend their mortgage to fund home improvements, a personal loan can be a much cheaper option.

Why a Personal Loan can be cheaper

Let's say for example that the White family is planning a bathroom makeover costing $15,000. The White's could fund the renovation by adding the $15,000 to their home loan. On a mortgage of, say, $250,000 charging annual interest of 7.5%, it's a strategy that could see the family pay as much as $18,250 in additional interest over the life of the loan.

By contrast, if the White's take out a personal loan costing 10% annually, over a 5-year term, the total interest bill would be around $4,120 - a long-term saving of $14,130.

It works this way because the term of a personal loan is far shorter than that of a mortgage, so while the interest rate may be higher, the debt is paid off much sooner. In addition to interest savings, it means borrowers aren't adding to their long-term household debt.

As an added plus, today's personal loans tend to be far more flexible in the past. Some operate as a line of credit, allowing funds to be accessed as the cash is needed, with interest only charged on amount drawn down.

Flexibility, coupled with manageable interest rates and a fixed term make personal loans worth considering. The key is to shop around for a good deal, comparing rates and terms, and only taking on debt that you can comfortably afford to repay.