A personal loan is a sum of money that you borrow from a lender, such as a bank or credit union, over an agreed time period. The loan is paid back in regular weekly, fortnightly or monthly instalments with interest, which may be fixed or variable across the life of the loan.
With a personal loan you can borrow between $2,000 and $50,000 across 6 months to 7 years. However, there are some lenders that offer up to $100,000 for individual or joint applicants. In addition to a set repayment schedule, some lenders will also allow you to make early repayments. This gives you the flexibility to reduce the time to repay your personal loan, meaning you save on interest costs.
Low rate personal loans can be more cost-effective than other types of finance. Each lender will offer different interest rates that you have to pay on the amount you owe. When comparing against other sources of finance, (e.g. credit card, line of credit, home loan top-up), it’s worth checking carefully for any fees and the amount of time you have to pay back the loan when comparing against other sources of finance (e.g. credit card, line of credit, home loan top-up).
Interest rates and comparison rates can sometimes hide the true cost of a loan. Your monthly and total repayments provide a clear basis for comparing the value of personal loans from different lenders.
Uses for personal loans
Personal loans are designed to be flexible, providing you with a high degree of choice as to how you use your funds. That being said, you will need to share your loan purpose with your lender when you apply. This loan purpose will be taken into account when considering how suitable a personal loan is to your situation and the maximum amount your lender is willing to offer you.
Based on a recent review of Plenti personal loans, there are seven loan purposes that Australians borrow for more than any other:
Debt consolidation (25%)
Home improvement (22%)
Buying a car (18%)
Solar panels and home batteries (13%)
Travel & holidays (5%)
Medical & dental fees (2%)
Weddings & honeymoons (2%)
Each lender will have its own criteria for assessing loan purpose, so it’s important you make sure your purpose is clear before you apply. For example, things like tax bills, court fines or penalties and margin loans are unlikely to be acceptable purposes to lenders for a personal loan. Neither are borrowing for overseas transfers, gambling, weapons, savings or for anything deemed to be illegal. Rest assured, however, if you have a genuine purpose for the funds and a demonstrated ability to repay you will find a lender to suit your needs.
Types of personal loans
The different types of personal loan can significantly change the costs involved and what is needed from you in order to be approved for a loan. It’s important to weigh up which is best for you.
Fixed- vs variable-rate personal loans
Personal loans have two interest repayment types, fixed and variable. Both have different features that will influence whether they are suitable for you.
With a fixed-rate personal loan, the amount you pay in interest is set from the beginning of the loan through to completion. This means your weekly, fortnightly, or monthly repayments remain the same. When you choose a fixed interest rate, you benefit from being able to lock in a competitive rate with the security of knowing your repayments will remain steady regardless of changes in the market. This is a useful feature when managing a budget.
Fixed-rate loans do, however, tend to attract a higher rate of interest than the current variable rates on offer. That being said, when interest rates are already low, locking in a fixed rate can protect you from any future rate increases due to changes in the lender's funding or the the broader economy.
Why choose a fixed interest personal loan?
+ Repayments are set for the duration of the loan + Easier to maintain a budget – Early repayment or exit fees are more common – Less flexibility when it comes to repayments
With a variable-rate personal loan, the interest rate can change or vary over the life of the loan. Variable interest rates can change for a number of different reasons (e.g. market changes, cost of funds etc.) and can vary between loan providers. When rates move down, you as the borrower benefit from lower repayments. When rates move up, you will need to be able to cover the added costs. To account for this uncertainty, variable-rate loans have a lower starting price than their fixed-rate counterparts.
Want greater flexibility or are hoping to pay your loan back early? Variable-rate personal loans often have fewer repayments restrictions than fixed-rate loans, so you can make additional repayments and repay your loan early without getting charged an early repayment fee.
Why choose a variable interest personal loan?
+ Greater flexibility to repay your loan early, often without fees + Benefit from any reduction in interest rates + Interest rates are generally lower – Potential for rates to move up significantly
Finally, it’s worth remembering that the rate you may be offered on a personal loan may be higher than the advertised fixed or variable rate. The lender will usually decide your interest rate based on your credit score, income, expenses, and assets. So, whilst the variable option may seem more favourable initially, once you’ve received a personalised rate estimate, a fixed-rate personal loan may have a lower rate, and vice versa.
Secured vs unsecured personal loans
If you own an asset like a car, home or term deposit, you may be able to access a lower interest rate with a secured personal loan. With a secured loan, your asset(s) will be put up as security for the loan. This means that as part of your loan approval and acceptance, you will grant the lender rights over the asset, usually in the form of a mortgage, caveat or charge. In the unlikely event that you are unable to make your repayments, the rights granted to the lender will allow them to seize the asset(s) and on-sell them so that the outstanding debt can be repaid.
Because of this, lenders view secured loans as less risky and therefore are willing to offer a lower interest rate. Having an asset-backed loan may also allow you to borrow a larger amount or for a longer period than would be available to you if the loan were unsecured.
Some secured loans have special rules that impact what or how you can use the funds. For example, a secured car loan may place restrictions on the type of car, whether it is new or used, or the maximum age of the car being bought. This is to ensure that the asset's loan to value ratio (LVR) is sufficient to cover the outstanding value of the loan in the event of default.
Why choose a secured personal loan?
+ Lower rates on offer + Increased borrowing capacity + Longer loan terms available – Potential to lose the asset if you are unable to repay – Longer approval process and requirements – May have restrictions on what funds can be used for
Whilst there are benefits to a secured loan, the vast majority of personal loans are unsecured. With an unsecured personal loan, no assets are used as security against the loan. In this case, a lender’s decision to provide you with a loan is based solely on how creditworthy you are. Put simply, are you more or less likely to make your repayments on time or default on the loan? As a result, choosing an unsecured loan may result in a higher interest rate or lower loan amount being offered.
Why choose an unsecured personal loan?
+ Quicker application and approval process + Greater freedom in the use of funds + Your assets are not directly at risk – Interest rates can be higher – Your borrowing capacity may be lower – May only be eligible for shorter loan terms
Fixed-term personal loan vs a line of credit
Fixed-term personal loans work well where you have a specific one-off purchase to make or defined expenses to pay, such as buying a car or paying for a wedding or holiday. They also attract lower interest rates than lines of credit, while providing you with the confidence that comes from having a predictable repayment schedule. Having a defined start and end date also ensures you are committed to repaying the debt and you are repaying the principal amount of your loan.
If it's flexibility you are after, some personal loan providers offer top-up, redraw or second loan options for borrowers.
A ‘top-up’ is where you add an additional amount to your existing loan. This will result in a change in your repayments and can sometimes result in a resetting of your loan term. It remains one loan, with a single repayment schedule for your convenience.
A ‘redraw facility’ allows you to make early repayments on your personal loan. The early repayments create a buffer between the actual amount you have repaid versus the amount that would have been outstanding on your loan original repayment schedule. This buffer is the amount you are able to withdraw at any point during the loan. In this case, your repayment schedule and amount remain the same.
Some lenders may be willing to offer you a second loan while your original loan balance is outstanding. To qualify, you will need to have maintained an impeccable repayment record (i.e. no missed payments in the last 12 months) as well as be able to demonstrate you can service a second loan (e.g. you have surplus income after your existing expenses). Different lenders have different credit policies, so it pays to do your research.
Why choose a fixed-term personal loan?
+ Know how much you are borrowing and repaying + Fixed repayment schedule + Lower interest rates + Better if you are less disciplined with your spending – A single lump sum may be more than you need – Less flexibility
A line of credit is a type of personal loan that works like a credit card. It allows you to draw on funds in the form of an ongoing credit facility. You pay off the debt and accrued interest in instalments, in the meantime, you can access a set amount of extra funds as you need it.
Unlike a personal loan where you get one big lump sum, a line of credit gives you a credit limit but the funds stay where they are until you withdraw them. The advantage here is that you only pay interest on the money that you actually use versus the entire amount as would be the case with a personal loan. Generally, a line of credit loan is useful if you need ongoing access to money but don’t know yet exactly how much. Some lenders provide a debit card for this.
Lines of credit offer the benefit of having ongoing access to money to spend as you wish or in case of emergency. A word to the wise: if you get tempted to spend just because you can and lack the discipline to make full payments on time, the higher interest from a line of credit can add up quickly. These loans usually come with numerous fees and charges.
Why choose a line of credit?
+ Access to funds as you need them + Only pay interest on the outstanding balance + Ongoing access to funds – Higher interest rates if you don’t repay in full – Higher fees – Risk of overspending with ease of access to funds
Special purpose personal loans
Some lenders offer personal loans with lower interest rates provided the funds are used for a specific purpose.
A green loan is an unsecured personal loan that you can use to fund the purchase and installation of approved renewable energy products (like solar panels or home batteries). These products can help significantly lower your power bills and the cost of the loan can potentially be offset by the power savings alone.
Green loans have specific criteria that may vary by lender. This may include the types of renewable technology covered, all the way down to the brand, make and model of device being installed. In order to facilitate this, the majority of green loans are offered at the point of sale by a fully accredited renewable energy installer from a list of pre-approved products. The accredited installer will assist you with your finance application and once your products have been installed, the lender will pay the installer's invoice directly.
A Plenti Green Loan ranges from $2,000 to $50,000 and 3 to 7 years, however, the average loan size is around $8,000 to $12,000.
Market Insight. Plenti is the largest provider of interest-bearing renewable energy loans for consumers in Australia. As of March 2021, Plenti has lent over $120 million toward solar and home battery installations.
Repairing, remodelling or revamping your home can be a great way to add to the value of your property. Some lenders offer specialised loans for home renovations. These can be secured or unsecured and may attract a lower rate of interest than a standard unsecured loan.
To qualify for this lower rate, however, there may be additional costs (e.g. fees for registering mortgages or charges over secured property) and information requirements (e.g. detailed quotes, council approvals and valuations). There may also be restrictions around the use of funds, for example, some lenders will pay the borrowed amount directly to the provider(s), making it a less flexible option than a traditional personal loan.
It is now more common for lenders to give a ‘personalised’ interest rate and tailor the loans offered. This is achieved through ‘risked-based’ pricing, where the rate provided is based on the probability of a borrower defaulting on a loan. The lender will calculate this by looking at your credit history, financial situation, loan type, loan amount and a range of other factors that are used to build your unique risk profile. If you are deemed ‘low-risk’ and more likely to pay back the loan, you’ll be rewarded with a lower rate, and ‘higher risk’ with a higher rate.
In the past, risk-based pricing wasn’t common in Australia, mainly because credit reports only showed negative credit events or ‘black marks’ (e.g. missed payments or defaults), rather than giving an overall picture. With the introduction of comprehensive credit reporting (CCR) credit providers are now required to include extra ‘positive’ information such as the type of credit you hold, the amount of credit and whether you pay your bills on time.
Most lenders will provide you with a rate estimate or quote before you go through their online application process (which does not affect your credit score). From there you should be well placed to compare the features and benefits of each loan.
What is my credit score?
Based on the information in your credit report, your credit score, or rating, is a single number that sums up how risky – or trustworthy – you are as a borrower. Credit scores are typically on a scale of 0–1,200 or 0–1,000 depending on the credit agency you use. The higher your credit score, the more ‘reliable’ you are perceived to be and the greater the likelihood of your loan being approved.
Now that the industry uses comprehensive credit reporting (CCR), credit reports are more detailed so that lenders have a better picture of both the positives and negatives. To calculate your credit score, credit agencies will assess:
How much money you’ve borrowed in the past
How much credit you currently have
How many, and what type of credit applications, you’ve made (this can now include payday loans and buy-now-pay-later services such as AfterPay)
Whether you pay on time
Any loan defaults
Information from your bank, telco, insurance and utility companies
Your age, address and employment situation
Up to two years of your general financial history
You can request your report and rating/score from credit rating agencies before you go through and pay for the application process. This does not impact your credit score. Be aware that because there are multiple credit agencies, the information your lender uses may not be exactly the same.
Get your free credit check from one of Australia’s major credit rating agencies: Equifax, Experian or Illion.
Personal loan features vary across different lenders. Understanding the different building blocks of a loan is important in helping you compare and choose the right personal loan.
What to look for in a personal loan
The interest rate, also known as Annual Percentage Rate (APR) or Advertised Rate, is the percentage that you’ll pay on top of the amount you borrow in interest, usually expressed as an annual rate.
Interest rates vary depending on the lender, your credit history, your repayment schedule and a range of other factors. They are based upon the lender’s calculation of risk (for you as an individual and the market as a whole) and their underlying costs.
Many lenders market their products using a ‘headline’ advertised rate, which represents the best rate they are able to offer a customer. Often this low rate is available to only a small proportion of borrowers. Before you apply anywhere, it pays to do your research and get a personalised rate from a number of providers. You just need to make sure that the lender’s quote process is ‘credit score friendly’. That is, they only conduct a soft check on your credit file, which won’t impact your credit score.
The competitive nature of the personal loans market in Australia means it pays to shop around for a better rate. That being said, the lowest interest rate does not necessarily mean the best loan. You need to consider the total cost of the loan, including interest, fees and other costs to truly assess the value of any interest rate on offer.
The comparison rate represents the overall cost of a loan, including the interest rate and fees, expressed as an annual percentage. As a result, the comparison rate is usually higher than the interest rate charged on the loan.
Under the National Consumer Credit Protection Regulations, lenders must provide a comparison rate when they advertise an interest rate. This was introduced to stop lenders from advertising lower rates when the total cost of the loan would be significantly more once fees and other costs were included.
For personal loans, there is a standardised measure for how comparison rates are calculated.
For personal loans 3 years and under, comparison rates are calculated on a $10,000 loan amount over 36 months.
For personal loans 4 years and over, comparison rates are calculated on a $30,000 loan amount over 60 months.
Whilst the comparison rate is a useful tool for comparing personal loans on a like for like basis, it’s important to remember that not all costs are included. For example, you still need to consider:
Late repayment fees
Early repayment fees
Deferred establishment fees
Your repayments are the amount you agree to pay to your lender on a regular schedule. Repayments can be weekly, fortnightly or monthly and vary by lender.
Whereas interest rates and comparison rates can sometimes hide the true cost of a loan, your monthly and total repayments provide a clear basis for comparing the value of personal loans from different lenders. When making your comparisons, however, it is important that the loan repayment calculations have been quoted inclusive of any ongoing fees for all lenders.
Upfront fees, also known as establishment fees or credit assistance fees, are ‘once-off’ charges that are applied at the commencement of a personal loan. These fees can be:
A flat fee (e.g. $150) that applies regardless of the value of the loan
A tiered fee (e.g. $250, $500, $750) based on the total amount borrowed
A percentage fee (e.g. 4%) based on the total amount borrowed and the credit risk of the customer
A hybrid fee (e.g. $200 + 2% of the loan amount)
Upfront fees are usually capitalised to the loan. This means the upfront fee is added to the amount you wish to borrow. For example, if you are borrowing $10,000 with an upfront fee of $300, the total loan amount on commencing the loan will be $10,300.
Why is this important? Well – that interest rate you are being offered will be applied to the total loan amount – inclusive of your upfront fee. In the case of a small upfront fee, the difference might be a few dollars on each repayment. On an upfront fee of 4%, however, you could be paying $1,200 on a $30,000 loan, meaning you will be charged interest on a $31,200 balance. Ouch!
If you’re considering a lender with a low interest rate, it’s important you check to make sure there isn’t a high upfront fee that outweighs the benefit of the lower rate. This is particularly true of percentage-based fees that flex with the amount being borrowed. Checking the comparison rate and the proposed repayments will allow you to assess this compared to other lenders.
Ongoing or monthly fees
Ongoing fees, also known as account keeping fees or loan management fees, are fees that are paid every month across the life of the loan – without reducing the amount you owe. For example, a $10 monthly fee on a 5-year loan adds up to $600 across the life of the loan. That’s a lot of money that’s not going to repaying your loan principal.
Like all fees, the presence or absence of monthly fees is all relative to the total amount you repay over the life of the loan.
Banks and larger lenders often have lower upfront fees that are offset with a monthly fee of $10 to $13. This means the net cost of the upfront fee and the monthly fee may be higher than you otherwise would have paid for a lender with a higher upfront fee and no monthly fees. In the end, it pays to do the math on ongoing fees before you commit to a particular lender.
Early repayment fees
Repaying your loan as quickly as possible is a clever strategy as it will reduce the overall amount of interest you pay on your loan. However, if you do find yourself in a position to do this (well done!), the last thing you want is to be hit with an early repayment fee (also known as an exit fee).
Early repayment fees can range from $0 up to $800 or a % of the loan value on repayment, with $150-175 being the most common fee. That’s a fair amount for you to pay for doing something that is good for you. Therefore, it pays to read the fine print on fees before you commit to a loan.
It’s worth noting that some lenders have set conditions that trigger an early repayment fee that varies with the type and duration of the personal loan. For example, unsecured fixed interest rate personal loans with the banks often have far stricter early repayment terms than for their variable-rate loans. Lenders with no early repayment fees ultimately provide you with the highest degree of flexibility in how and when you repay your loan.
Market Insight. The average Plenti borrower takes just 28 months to repay a 3 year loan and 43 months to repay a 5 year loan. That’s a lot of people who are saving thousands of dollars in interest thanks to no early repayment fees.
We all know we should try to avoid penalty fees at all costs — it’s just throwing your money away — but we’ve all missed a direct debit from time to time. That's why you should always make sure you are aware of any penalty fees and make sure they are not too onerous.
The most common penalty fee associated with personal loans is the ‘default’, late or missed payment fee, which usually arises where there are insufficient funds in your nominated account on the day a payment is due. Late payment fees range from $20 to $35, however, some lenders will waive the fee if the account is brought up to date within 3 days.
It can help to make a budget of your expenses before you agree to the loan so that you know that you’ll comfortably be able to make repayments. You should also consider opening separate savings accounts to transfer funds into each payday that separate from your daily transaction account to ensure funds are always available.
When it comes to penalty fees, it is a case of buyer beware. Always take the time to read the loan terms and conditions and look out for any other hidden fees, including ‘new age’ penalty fees like charges to receive paper statements.
The loan amount is how much you intend to borrow. This is the principal amount upon which interest is paid (plus any upfront fees). In Australia, lenders have a minimum loan amount and maximum loan amount that they accept. These generally range from $2,000 to $50,000, although a small number of lenders may lend up to $100,000 for individual and joint applicants.
Within the advertised range, however, most lenders apply loan capping rules. This means they adjust the maximum loan amount you may be eligible for based on your credit score, income, mortgage status and a range of other factors. This maximum loan eligibility will usually be communicated to you when you get an initial quote or rate estimate from a lender.
Even once you have applied with a lender for a specific loan amount, they may come back to you with a ‘counter-offer’. A ‘counter-offer’ is a conditional approval based on a loan amount that is lower than the amount you’ve requested but one the lender believes you can afford and meets their responsible lending requirements.
Whilst it may be tempting to borrow as much as you can, make sure your repayments will be realistic to make within your budget. This will be a significant factor in determining whether your loan will be approved.
The loan term represents the length of time it will take to repay the loan in full with a regular repayment schedule. In Australia, lenders offer terms from 6 months to 7 years, with 3 and 5-year terms being the most common. A longer-term loan will usually attract a higher interest rate and the loan will cost you more overall but your repayments will generally be lower.
All lenders operate differently. So whilst customer experience isn’t a traditional product feature, it does go a long way to determining how quick and easy it is to apply, get approved and manage your loan. Trusting you are getting the best deal, a lender who cares about your experience should be a key factor in your decision.
The best place to start doing your homework is to check out reviews on third-party websites that provide independent and verified feedback about customers' experience with a lender. They tell you a lot about the customer experience at an aggregate level more than any list of features and attributes might. Product Review, TrustPilot and Google Reviews all provide insights into the best performing personal loan providers.
Each year, Canstar assesses and ranks 100s of personal loans to help borrowers to decide which ones will be awarded a 5-star rating. In addition to rating the overall product’s value (80% of the score), Canstar’s ratings also attribute 20% of the rating to the loan’s features. This includes Loan Management and Customer Service and Support. For a loan to get a 5-star Canstar rating, the lender has to provide great customer service and tools, such as an online portal for managing your loan and repayments.
Market Insight. Plenti is the only online lender to have received Canstar’s Outstanding Value Award for personal loans six years running: 2015, 2016, 2017, 2018, 2019 and 2020.
Applying for a personal loan is quicker and easier than you might think.
Find out whether you are eligible
Whether or not you are eligible to get a personal loan, and how much you can borrow, varies from lender to lender, from loan to loan.
At a minimum, you need to:
Be at least 18, sometimes 21 or over
Be an Australian citizen or permanent resident, although some lenders do loan to people on temporary work visas such as 457
Be earning at least $25,000 per year, sometimes more, from a regular source of income that you can demonstrate
Have at least a provisional or full driver’s licence
Some lenders, although not all, will consider:
Applicants with existing loans or debt (there may be fewer options)
The self-employed, usually with additional criteria
People on a low income, the pension or Centrelink payments
Be sure you check the eligibility criteria for any lender you are considering to avoid impacting your credit score on an application you would never have been approved for.
What is the process
Once you have shortlisted lenders you can usually get a quote or estimate of your estimated borrowing power and some loan options, before you apply.
Depending on the lender, you can then apply online, over the phone or in-person if the lender has physical branches. You’ll usually need to verify your identity, connect to your online banking to verify your income and expenses and potentially provide additional information based on your loan purpose.
If approved, you’ll need to accept your loan agreement. The majority of personal loans can be signed and accepted electronically.
What documents will you need
The documents lenders need to process your application vary, but usually it will include:
Proof of identification: Australian drivers licence or a passport and some bills for proof of your address
Verification of your income: payslips, bank statements or tax returns
Showing your expenses and liabilities: via bank, credit card and loan statements
Some lenders, such as Plenti, have a streamlined online portal, where you can connect to your bank and share your data securely. This makes the process much quicker and easier.
What will your lender consider
Your lender will review:
Your employment stability
Your income (e.g. salary, rent, interest, etc.)
Your expenses (e.g. mortgage, groceries, etc.)
Your repayment history
Credit agency/bureau information (credit report and score/rating)
These determine if you’ll be approved and for how much. If you’ve had problems paying your bills and debts in the past, you may only be offered loans at higher rates.
Improve your chances of getting approved
Applying for a personal loan has the potential to impact your credit score, particularly if your application is declined. Therefore, it's important that you put your best foot forward before beginning the application process. We’ve assembled a useful selection of tips to help you submit a strong loan application.
Make sure you pay your existing debts on time
Did you know that repayments that are more than 14 days late may be recorded on your credit file? While less serious than a default, a series of late repayments can have an equally negative impact on your credit score. Making late repayments also sends a bad message to a prospective lender and may result in you paying higher interest rates.
If you do ever find yourself behind on your repayments, it’s important you contact your lender directly. Working with your lender toward a mutually beneficial outcome can help to protect your credit score. Remember, it’s far easier to protect a good credit score than it is to improve a weak one.
Only request as much as you need to borrow
When assessing your application, a lender will look at whether you can service a loan. Essentially, this evaluates whether, after all your expenses, you have income left over to meet the repayments of your proposed loan. If you request an amount that is more than your finances suggest you are able to repay, it’s highly unlikely you will get approved.
In some cases, a lender may offer you a longer loan term to reduce your repayments, but it’s best to do your homework first. Use a repayment calculator and budget to figure out what you can reasonably afford.
Review your credit history
Australia has three main credit bureaus, Equifax, Illion, and Experian. You can request a free copy of your credit score once a year. Once you’ve verified your identity (i.e. with a driver’s license, passport etc.) the bureau is required to provide you with your credit report within 10 days. Your credit report will provide an overview of your credit history, including previous loans, existing debts, and your performance as a borrower.
You should ensure all the information contained in your credit report is accurate, and if not, contact the bureau to have it remedied. This will have a direct impact on your credit score. If you’re unsure of how to interpret your credit score, see this ASIC guide.
Pay down existing debts
Lenders may look unfavourably on an application for individuals with large amounts of debt, particularly if the debts are already at the limits of what they can afford. It’s important to demonstrate a concerted effort to repay your existing debts to a reasonable level. This applies even if your personal loan is for the purpose of consolidating your debt.
While a move to lower interest rates makes sense, it may be harder to get approved unless without opening up some additional capacity between your income and expenses.
Minimise your credit card balance
Using a credit card can be a great way to help boost your credit rating by demonstrating you are financially responsible. However, you need to manage your credit card carefully to ensure your balance is consistently low. Failure to make repayments can have an equally negative impact on your credit score.
Finally, lenders are now required to assess your application based on your credit card limits, not the outstanding balance. If you have unused cards or excess limit, look into reducing them before you apply for a new loan.
At Plenti, we assess your loan application in line with our credit criteria and our responsible lending obligations. Whilst no guarantee, following the tips above will go a long way to improving the prospect of successful loan approval.
You may have your personal loan approved within a minute, or it can take as long as a couple of weeks. Most digital lenders process and approve applications within 24 hours, provided all documents have been submitted. If you are approved, the funds will usually be deposited in your nominated everyday account or paid out directly to a nominated party (e.g. car dealer, credit card provider etc). This will generally take one business day.
There is no one-size-fits-all when it comes to personal loans. It really comes down to finding the best fit for you. So how can you decide which is right for you?
First, you need to make a few key decisions. Planning and considering your situation upfront will help when comparing what personal loan products are available that might really fit your needs, and offer the best value.
1. Decide how much you really need
To decide how much you need to borrow (loan amount), do some research and budgeting to work out how much (approximately) you are going to need for that car, holiday or wedding. In the case of debt consolidation, it helps to know exactly which debts you are consolidating and how much money you have outstanding. It’s smart to only borrow what you really need, rather than all that may be offered to you by a lender.
Remember, when you borrow money to pay for something, the actual ‘cost’ of that item becomes much higher when you factor in the cost of the loan. For example, if you borrow $20,000 to buy a car with a 5 year Unsecured Loan and a fixed interest rate of 12.50%, once you factor in interest and fees that car may actually cost you around $27,417.
2. Decide how much you can afford to repay
Look at your everyday budget, or create one, to see how much you can realistically afford to put towards repayments. It’s always good to give yourself a buffer; failure to make a repayment at any time can cost you a lot. Are you expecting any major expenses or changes in income in the next few years, perhaps changing where or how much you work or perhaps hoping to have a baby? Be sure to build this in.
Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have leftover at the end of each pay period and how this will align with your repayments. This is to ensure there are no missed payment surprises. It may be worth opening a separate bank account for your repayments and transferring these funds in on payday so you are never caught out
3. Decide how long you will need to repay
Divide the loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Jo wanted to borrow $24,000 to pay for his upcoming wedding. Based on his salary and existing expenses, he thought $120 per week / $480 per month would be an affordable repayment. This would be $5,760 per year, meaning in 5 years he’d have paid $28,800— roughly the full amount, accounting for interest and charges.
A longer-term loan might seem attractive as it means lower monthly repayments, however, the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest, and potential fees. That being said, provided you look for a loan with flexible repayments, you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.
4. Decide between a secured or unsecured loan
Do you have an asset that you are willing, or able, to put up as security against the loan? Perhaps property, or the new car you’re planning to purchase? If you are confident in your ability to repay the loan, then a secured loan will get you a better rate and may unlock access to greater funds. Be aware however that your asset will be at risk if you can’t make the repayments.
5. Get your rate estimates and compare your offers
Now you know roughly how much you need to borrow, what you can afford to repay, and how long you’ll need to repay your loan. Next you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments.
Experiment with different combinations, such as different loan terms or repayment amounts, and match them against your needs. Need more help deciding? There are many third party agencies (that don’t sell loans) that rate and compare a broad range of loans.
Canstar is one of the most established financial comparison sites, and they’ve been comparing products without bias since 1992. They release annual star ratings for a range of personal loans from many providers. To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia. To come up with an overall score, they award points for:
Price — comparative pricing factoring in interest and fees
Features — like the complexity of the application, the time involved before settlement, product management, customer service, and loan closure
These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide, but dig deeper if you want to. Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element — that is they may receive money for the people that visit their website en route to a particular lender.
So if the best rate isn’t being offered, it may not show up on their comparison. They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans do not truly reflect the best value loans on the market.
Another way to get information on your lender and loan is to read feedback from real, verified customers’ on ProductReview.com.au.
What questions should I ask when comparing?
Here’s a useful checklist to be confident you understand your loan.
What are the interest rate and the comparison rate?
How do these rates compare to other loans?
What are the fees and charges? (e.g. upfront, ongoing, early exit)
What are the terms and conditions?
Do the loan term and loan amount fit your needs?
Can you afford the repayments?
Are you comfortable with the lender? Have you checked its reputation and accreditation?
Get ready to compare
Taking the time to compare personal loans is worth the effort. Once you have an idea of what type of loan that you’d like, it becomes easier to compare apples with apples. Comparison rates can be a really important tool to compare personal loans.
For example, if a personal loan has an interest rate of 11.35% p.a. and a comparison rate of 13.47% p.a., that means this loan includes a high amount of fees. If the loan has an interest rate of 10.13% p.a. and a comparison rate that is the same, it shows that there aren’t fees included in the loan.
Always make sure you are comparing loans that are like-for-like. That means each product has the same loan term, loan amount and loan type (e.g. secured vs unsecured).
Other factors to consider
Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved are a major factor, but once you've shortlisted a few loans with similar costs, there are some other things to check out:
Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this. Compare a loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term.
Can you use the funds for what you need? You can’t always use the borrowed money for whatever you like, particularly if you’re taking out a Secured Loan. For example, if you are taking out a car loan, you’ll only be able to spend the loan funds on a vehicle purchase, and the vehicle needs to be eligible according to the particular lender's criteria (such as new, secondhand, age). Some lenders don’t allow you to take a personal loan for business purposes. Make sure you can use your loan how you need to.
What are the options for managing the loan? Check and compare how easy the loan will be to manage. The option to manage your account online is often available but not always. Using direct debit for repayments is common, however, if it's not, manually paying is less convenient. It also increases the likelihood of late payments if you aren’t especially disciplined.