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A guide to personal loans in Australia
Our detailed guide touches on everything you need to know about personal loans in Australia. Find out how they work, the available types, requirements, application process and everything in between.
What is a personal loan?
A personal loan is a cash advance received from a lender. Personal loans generally involve the following:
- Loan amount. This refers to the size of your loan. Personal loan amounts range between a minimum of $2,000 and a maximum of $100,000.
- Loan term. This refers to the length of your loan. Generally, repayment periods range from a minimum of 12 months to a maximum of 84 months (between one and seven years).
- The cost of borrowing. The lender provides you with the money you need at a cost. Loan costs include interest plus other fees and charges that are typically applied to personal loans.
What are the interest rates for personal loans?
The interest rate or the advertised rate is the percentage applied to your loan amount. The resulting charge ensures that you pay back more than you borrowed so the lender can make a profit. Annual personal loan interest rates differ from lender to lender. However, competitive rates have low percentage figures that help you save money.
What are the comparison rates for personal loans?
The comparison rate can also vary from lender to lender. It is an inclusive percentage that combines the interest rate and all other fees and charges associated with your personal loan. Comparison rates are, therefore, valuable tools that enable you to shop around and choose a loan based on its true cost.
What loan fees and charges are associated with personal loans?
Besides interest, lenders may also add other fees and charges to your personal loan:
- Establishment or application fees – these are usually once-off and paid upfront.
- Monthly services fees – these are ongoing fees which are included in your monthly repayments.
- Annual fees – paid once a year for the duration of your loan term.
- Penalty fees – charges for missed or skipped payments. Some personal loans also come with additional or early repayment fees.
- Redraw fees – if the personal loan has a redraw facility, that means you can borrow back any extra repayments. But, using this service may come at an additional cost.
How do personal loans work? – Step-by-step process
In summary, a personal loan involves the following steps from start to finish:
Australian personal loan lenders have various application methods which include applying online, through a phone call, or via in-branch visits. Before applying for a personal loan, check if you meet the lender’s requirements.
Personal loan requirements vary between lenders and from loan type to loan type. If you qualify, you proceed to fill in an application form. You also provide a set of documents that contain details about your identity, assets, as well as employment and financial history.
The lender assesses your application to work out how much you can afford and the level of risk you pose. They do this by analysing your income, expenses and other personal financial details. The lender also carries out a credit check to see if you have borrowed responsibly in the past.
Signing the loan contract
Upon approval, the lender will set up a loan contract which contains the terms of your personal loan. These details cover aspects such as interest rate, fees, loan terms, and the structure of your repayments. Signing the loan contract means you understand and agree to the terms and conditions stipulated by the lender.
Once the loan is paid into your bank account, you can use it in various ways. You also start making repayments every month, although some personal loans have weekly and fortnightly repayments. Overall, the process of applying and receiving funds can take anywhere from 24 hours up to 14 days.
What are the types of available personal loans in Australia?
The Australian personal loan market has many options to choose from. We have provided a comprehensive list of the various types of personal loans based on a multitude of factors.
Types of available personal loans – Based on asset requirements
All personal loans are either secured or unsecured:
The cash advance is backed by collateral or an asset such as a car or property. The asset used to guarantee the loan could be one that you already own. The asset could also be the one being paid for by the personal loan itself. This arrangement lowers the risk for the lender, which helps you to get a better deal.
Pros of secured loans. They have lower interest rates and fees and often enable you to borrow large amounts of money for more extended periods. You may also be able to qualify for a secured loan if you have an average or bad credit score.
Cons of secured loans. The lender may restrict the type of asset you can use to secure the loan. There’s also the risk of losing your asset if you default.
Unsecured loans have no asset requirements. However, without a guarantee, there’s more risk to the lender. Therefore, this type of loan usually has less favourable terms than a secured loan.
Pros of unsecured loans. There’s less paperwork involved during the application process. There’s also no risk of losing the asset due to missed payments. Generally, unsecured personal loans offer more flexibility when it comes to how you use the loan.
Cons of unsecured loans. They usually have higher interest rates. While there’s no risk of losing your asset if you default, your credit score could be negatively affected.
Also, if you have a low or poor credit score, you might not be able to qualify. Lastly, this type of loan might have more restrictions in terms of how much you can borrow.
Types of available personal loans – Based on interest rate
Personal loan interest rates can either be fixed or variable:
Fixed interest rate personal loans
These have a constant or unvarying interest rate from when you sign your loan contract until you finish making repayments.
Pros of fixed-rate loans. They offer fixed payments that make for an easy budgeting process. If the cash rate increases, your monthly payments will not be affected.
Cons of fixed-rate loans. If the cash rate drops, you won’t be able to benefit from a lower interest rate. This type of loan might also not be as flexible as its variable-rate counterpart.
Variable interest rate personal loans
A variable rate typically fluctuates in line with the Reserve Bank of Australia (RBA) cash rate, so your monthly payments will also fluctuate.
Pros of variable rate loans. The loans are usually more flexible, and you save on interest if the rate goes down.
Cons of variable rate loans. If the variable rate goes up, you pay more interest. Fluctuations can also make it difficult to budget for your monthly repayments.
Types of available personal loans – Based on credit rating
Excellent credit personal loans
The exact score range for excellent credit depends on the credit reporting bureau. Using Equifax or Experian standards, it’s somewhere between 800 and 1,2000. A credit score that ranks this high is strong proof you’re a responsible borrower.
It’s easier to qualify for the best personal loan interest rates if lenders believe you’re more likely to repay your loan as agreed. Excellent credit loans, therefore, have some of the lowest and most competitive interest rates on offer.
Good credit personal loans
Good credit personal loans generally have better interest rates than loans for average or bad credit. However, the rates might not be as competitive as those offered to excellent credit borrowers.
To qualify for a good or very good credit personal loan, your credit score must be between 622 and 832 according to Equifax. This range is between 625 and 799, according to Experian. Lastly, Illion, another Australian credit reporting agency, has a score range of 500 to 799 for good and great credit scores.
Average credit personal loans
An average Equifax credit score ranges from 510 to 621. For Experian, the range is set from 550 to 624 while an Illion average credit score is between 300 and 499. While you might still qualify for a personal loan with average credit, it might be difficult to find competitive rates.
Bad credit personal loans
Bad credit personal loans are associated with high-risk borrowers. That might mean credit scores below 509 as defined by Equifax or below 549 as defined by Experian. Illion bad credit scores range from 0 to 299.
A low credit score indicates that you might not be able to repay your loan. This is a risk some lenders are not willing to take. Other lenders will offset the risk by asking for collateral or by charging higher interest rates and fees.
Types of available personal loans – Based on common uses
- Debt consolidation loans – Bundle your debt under one personal loan that has more manageable repayments and potential interest savings.
- Car repair loans – Fix your blown transmission or pay for other essential car repairs.
- Holiday and travel loans – Create more room in your holiday and travel budget to cater for your dream vacation.
- Home loan deposit loans – Get the deposit you need to secure a home loan.
- Home improvement loan – Give your house a makeover and transform your home environment without exhausting your financial resources.
- Wedding loans – Spread out the cost of your big day and create special memories.
- Medical loans – Get financial help to cover medical expenses.
- Dental loans – Make an appointment for your much-needed tooth filling, root canal or other dental procedure.
- Green loan – Embrace a greener lifestyle and reduce your carbon footprint through green projects for your home or business.
- Cosmetic surgery – Lower the high-cost bar of your breast augmentation, liposuction, nose reshaping, tummy tuck, facelift, or other cosmetic procedure.
- Credit card debt loans – Consolidate your credit card debt and escape the vicious debt cycle of high-interest credit cards.
- Swimming pool loans – Upgrade your lifestyle with a swimming pool or jacuzzi for a more defined “at home” relaxation experience.
- Tax debt loans – Stay ATO-compliant by clearing away your tax debt with a personal loan.
- Rental bond loans – Move into your new place and pay for your rental bond at a budget-friendly pace.
- Legal fees loans – Get the legal assistance you need and pay for it at a later date.
- IVF loans – Cover the costs of in-vitro fertilisation cycles and fertility treatments needed to start your family.
- General-purpose loan. Use your lump sum for any legitimate purpose.
Types of available personal loans – Based on the type of asset purchased
- Boat loans – Marine finance that covers purchases for fishing boats, yachts, and other recreational vehicles.
- Car loans – A finance solution for various vehicle purchases that include new and used cars, trucks, caravans, motorbikes, and classic cars.
- Engagement ring loans – If you’re planning for happily ever after, you can finance your high-value engagement ring for that “wow” factor.
- Time-share loans – Invest in a time-share and enjoy the benefits when vacation season rolls around.
- Jet-ski loans – Discover the freedom of open water with your watercraft purchase, whether it’s a Yamaha WaveRunner or a premium Kawasaki model.
- Equipment loans – Get the capital you need to buy or lease business equipment such as office equipment and heavy or specialised machinery.
Types of available personal loans – Based on demographics
- Self-employed. A viable finance option for Aussies who operate as sole traders, small business owners, freelancers, or contractors.
- Casual workers. A finance option designed for part-time or casual workers with irregular hours.
- Entrepreneurs. Used to fund small business start-ups, projects, expansions and other related expenses.
- Investors. Borrowed funds are invested in stocks, property or other investments that potentially offer high returns.
- Farmers. The funds are invested in Aussie farm businesses to facilitate growth and streamlined operations.
- Uber drivers. Car financing for individuals who want to kick-start successful careers as Uber drivers.
- Students. Covers various costs associated with uni studies, including tuition, accommodation, textbooks, and related expenses.
- Seniors and retirees. A loan option for retired individuals or those over the age of 60
- 457 visa holders. Offered to foreign citizens who are legally staying in Australia and who have a valid work visa.
Types of available personal loans – Based on how the loan works
- Peer-to-peer personal loans. Involves borrowing money from individual investors through peer to peer or market lending platforms with no banks involved.
- Online application personal loans. Obtained from online lenders who offer a quick and convenient application process. You can apply in the comfort of your home if you have a working internet connection and a smartphone or computer.
- Low doc personal loans. These require a minimal number of documents when applying.
- Joint applicant personal loans. Involves a co-borrower who shares the loan and responsibility for the loan with you. Adding a co-applicant to your personal loan can help you secure a better deal.
- Overdrafts. This line of credit is tied to your bank account. You can withdraw a limited amount even when your balance reaches zero.
- Credit cards. A line of credit you can draw upon any time up to a specific limit. Once the limit has been reached, you have to make repayments to continue spending (revolving line of credit).
Personal loans comparison in Australia
The personal loan comparison process involves looking at various loan features to find the best personal loan for you:
The best personal loan interest rate for you is the most affordable rate you can get. A lower rate reduces the cost of borrowing and keeps more money in your pocket. Therefore, it’s worth your while to compare similar loan options. You can then choose the most competitive offer based on the interest rate plus other factors.
If you check our comparison tables above, the interest rate or advertised rate is displayed alongside the comparison rate. This makes it easier to spot low-interest loans with expensive charges and fees. Remember, the comparison rate encompasses the interest rate plus all other regular fees that typically come attached with the loan.
Short term personal loans are usually paid off within 12 months. Standard loan terms range from 12 months to three or five years. Even longer terms of up to 7 or 10 years may also be available. Check to see if your desired repayment period falls within the maximum and minimum limits of a particular offer.
The average range for personal loan amounts is between $5,000 and $100,000. When you compare personal loans, check for the minimum and maximum amount limit. This ensures you only apply for relevant offers that meet your needs.
The comparison rate includes the advertised rate and standard fees. However, you also need to check for non-standard charges that are not included in the comparison rate, for instance, fees for redraw facilities.
Use our personal loans repayment calculator to compare loans for the same amount and term. This valuable tool shows your estimated monthly payments, which helps you choose a repayment plan tailored to your budget. When doing calculations, keep in mind that the more you borrow, the larger your monthly payments will be and the more interest you pay.
If your estimated payments leave you with little disposable income, you can add more months to your term. Note that a longer loan term may reduce your monthly payment, but you pay more interest in the long run.
This applies to whether you’ll be able to repay the loan comfortably and according to your preferences or circumstances. Does your salary come in every week? Then you might want to make weekly repayments on your loan. Do you expect to come into some extra money down the line?
Then you should be able to make extra repayments without being penalised for it. Find out if the loan has early repayment or early exit fees that can add to your debt.
Personal loans have many variable features. You may find some beneficial, while others may not apply to your situation. Your best bet is to look for unique loan features that make you more appreciative of the borrowing experience.
For example, a loan with a redraw facility gives you access to extra loan repayments you have already made. This can be a lifesaver when an emergency suddenly looms. On the other hand, you might prefer to have more disposable income instead of staying ahead on your payments. In that case, you might want a loan that offers a longer term and lower monthly payments.
What are the requirements for personal loans?
Australian lenders commonly use the following factors to define their eligibility criteria:
- Age. You must be at least 18 years.
- Credit history. Borrowers with different credit scores may qualify for a personal loan. However, most lenders view a high credit score as a major requirement.
- Employment situation. Some lenders only require permanently employed applicants. Others also extend loans to casual workers, pensioners, or the self-employed.
- Income. Typically, your income must be stable, regular, and above a certain monthly amount.
- Financial circumstances. Besides your monthly income, lenders may also require information about your assets, liabilities, and other expenses.
- Australian citizenship. Most lenders only offer loans to Australian citizens or those with permanent residency. Individuals on a 457 visa can also qualify for certain personal loans.
What documents should I provide when applying for a personal loan?
- Identification documents. A valid Australian ID, passport, or driver’s licence for proof of identity.
- Income and employment documents. Proof of income documents include copies of your payslips, bank statements, and business or personal tax returns.
- Other financial documents. The lender may request additional documents that detail your expenses, liabilities, assets and other financial commitments.
How to apply for a personal loan online
- Choose your personal loan details. Ask yourself a series of questions to define how your personal loan will work. What will you use the personal loan for? Do you want a secured or unsecured loan? Will the interest rate be fixed or variable? How much do you want to borrow? How long do you want the repayment period to be?
- Calculate your monthly repayments. Use this calculator tool to find out how much you can afford based on your loan term and loan amount.
- Compare personal loans. Use the factors outlined earlier to compare personal loans showcased in our comparison tables above. Apply the filter to ensure you only get relevant offers.
- Click the “Go to Site” button. After making your choice, click the appropriate “Go to Site” button in the comparison tables above. Next, submit your loan application on the lender’s website.
Frequently asked questions about personal loans
What is a debt consolidation loan?
A debt consolidation loan is a personal loan that pays off your various debts. If you take out a larger loan to pay off several smaller debts, you essentially gather the debt under one account. Your debt becomes easier to manage, and you could save money by only paying interest and fees for that one loan.
What is a redraw facility?
A redraw facility is an additional feature of some personal loans. It enables you to withdraw or borrow back extra repayments you have previously made.
Where can I get the best personal loan?
Personal loans are available from various Australian credit unions, banks, online lenders, and peer lending companies. To find the best personal loan for you, start by comparing the offers featured in BestFind’s comparison tables above.
How do I make repayments on my personal loan?
Most lenders will ask permission to set up an automatic direct debit. Other ways of paying your loan include bank transfers (automatic or manual), ATM or over-the-counter deposits, and BPAY. You can also check your loan contract’s terms and conditions or login to your account to verify other important loan repayment details.
What happens if I can’t make repayments on my personal loan?
It’s best to communicate your situation with the lender as soon as you can. Most lenders are willing to arrange a suitable payment plan. However, if you leave it until it’s too late, the lender may take legal action against you. If your loan is secured, your asset might be seized as the lender tries to recoup their losses.
How do I refinance a personal loan?
If you have found an offer with more competitive terms, you can refinance by applying for a new loan. The new loan then pays off the old one. Before you take this approach, make sure the costs of refinancing do not offset the potential benefits you’re seeking.
What should I do if my personal loan application is rejected?
Find out why this happened before you apply for other loans. You can ask the lender to supply a reason for the rejection. Common reasons include having bad credit and failure to meet income requirements.
Once you have a finger on the problem, take steps to improve your chances of approval on future applications. Paying your bills on time and fixing credit report errors can help you move in the right direction.
Will applying for a personal loan hurt my credit score?
Personal loan applications you make can usually be seen on your credit report. Too many credit applications over a short period will hurt your score. Lenders are likely to view you as a high-risk borrower who takes on debt they can’t afford.
How can I get a better interest rate on my personal loan?
To get the best personal loan interest rate, you can opt for a secured or joint applicant loan. Improve your credit score by making repayments on time and checking your credit report for errors. Keep in mind that some lenders offer set interest rates. Others offer different rates based on the client’s risk profile.
How can I improve my chances of approval when I apply for a personal loan?
Note that there’s never any guarantee that your application will get approved. However, you can still improve the odds by applying for a loan you can afford. Also, work on improving your credit score, or adding a co-applicant to make your application stronger.
How do I find the best personal loan for me?
Important factors to consider include whether the loan is secured or unsecured and if it has a variable or fixed rate. In addition, decide how much you want to borrow, and for how long.
Also find out if you qualify for excellent credit, good credit, average credit or a bad credit loan. Last but not least, check if the loan has a flexible repayment structure. For instance, you should be able to make additional repayments free of charge.
Are there any restrictions on how I will use my personal loan?
Some lenders may restrict how you use the loan. Generally, most personal loans are suitable for many legitimate purposes. If there are any restrictions, the lender will usually ask what you need the loan for when you apply.
How do I reduce the total cost of my loan?
The best way to make your loan affordable is to compare loans to find the lowest rate applicable to your circumstances. Paying off your loan quickly and borrowing less also ensures you pay less interest and fees in the long run.
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