A guide to personal loans in Australia
Nothing says flexible like a personal loan. From debt consolidation to home improvement and holidays – personal loans can open many doors for Aussie borrowers. But, before you sign up for this finance option, learn how to compare and find the best personal loan for your needs.
What is a personal loan?
A personal loan is when you strike an agreement with a financial situation. In this mutually beneficial deal, the lender gives you a fixed lump sum. You then pay it back with interest in smaller instalments and over a set period. Here’s a particularly detailed look at some key features of personal loans:
- Loan amounts. Your borrowing capacity typically ranges between a minimum of $2,000 and a maximum of $100,000.
- Loan term. Generally, repayment periods range from 12 months to five years.
- The cost of borrowing. The lender provides you with the money you need at a cost. These costs include interest plus other standard fees and charges.
What are the fees and charges for personal loans?
Besides interest, lenders may also add other fees and charges when you borrow money:
- Establishment or application fees – usually paid once-off and upfront.
- Monthly services fees – ongoing fees included in your repayments.
- Annual fees – paid once a year over your term.
- Penalty fees – charges for missed payments. Some personal loans also come with early or late repayment fees.
- Redraw fees – when the personal loan has a redraw facility, 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
- Application. Australian lenders generally provide many channels for applying. For instance, you can apply online, through a phone call, or branch visits. But, before you knock on their door, check first for the lender’s requirements. These vary from loan type to loan type. If you qualify, you then proceed to fill in an application form.
- Review by the lender. The lender first checks your application to work out how much you can afford. They do this by looking at your income, expenses and other details. In addition, the lender will carry out a credit check. This allows them to see if you have repaid your debts in the past.
- Signing the contract. When the finance provider approves your application, they also set up a contract with the terms and conditions for your debt. The fine print usually covers details such as interest rate, fees, terms, and the repayment plan. In short, signing on the dotted line means you agree with everything contained in the script.
- Making repayments. Once the money shows up in your bank account, you can use it for just about anything. Next, you start paying off the debt. Overall, the process of applying and receiving funds takes anywhere from 24 hours up to a few weeks.
What are the types of available personal loans in Australia?
The Australian personal loan market has many options to choose from. While this leaves you spoilt for choice, it’s a good idea to understand how these options work. For this reason, we have come up with a broad and inclusive list based on numerous factors:
Secured vs Unsecured
All personal loans are either secured or unsecured:
Secured personal loans
The debt is backed by collateral or an asset such as a car or property. In this case, the asset used to secure the debt could be one that you already own. It could also be the asset paid for by the personal loan itself. Most lenders find this arrangement safer, and it’s therefore, easier to get a better deal.
- Pros. Lower interest rates and fees. Generally, you can borrow large amounts of money for longer periods. You might also qualify for a secured loan even if you have a bad or low credit score.
- Cons. The lender may restrict the type of asset you can use as security. Secondly, there’s also the risk of losing your asset if you default.
Unsecured personal loans
Unsecured loans do not need an underlying asset as back up.
- Pros. There’s less paperwork involved during the application process. In addition, there’s no risk of losing the asset when there are repayment problems on your side.
- Cons. Without collateral, credit providers usually feel the need to insure themselves. They, therefore, offer less favourable terms. While there’s no risk of losing your asset if you default, your credit history may suffer.
Fixed-rate vs Variable-rate
Personal loan interest rates can be fixed or variable:
Fixed interest rate personal loans
If you choose this credit option, your rate stays “frozen” until you repay the loan in full.
- Pros. Fixed payments ensure a smooth budgeting process with little or no changes. Most importantly, if the Reserve Bank cash rate increases, it won’t affect your repayments.
- Cons. Whenever the cash rate drops, you won’t be able to enjoy a lower interest rate.
Variable interest rate loans
A variable rate personal loan typically goes up and down in sync with the Reserve Bank cash rate. Thus, your monthly payments will also fluctuate.
- Pros. The loans usually offer more flexibility, plus you also save on interest if the rate goes down.
- Cons. When there’s a rate upturn, you pay more interest. Constant rate changes can also make it tricky to budget for your payments.
Personal loans for different credit profiles
Excellent credit personal loans
The 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 a low interest rate personal loan when lenders trust your ability to repay debts. Excellent credit loans, therefore, have some of the most competitive rates on offer.
Good credit personal loans
These generally have better rates than loans for average or bad credit. However, the rates might not be as competitive as those offered to excellent credit clients. To qualify, your credit score must be between 622 and 832, according to Equifax. Similarly, this range is between 625 and 799, going by Experian standards.
Average credit personal loans
An average credit score ranges from 510 to 624. While you might still qualify for credit with this rating, finding competitive rates could prove difficult.
Bad credit personal loans
Bad credit personal loans allow people with a low credit score to still borrow money. A poor credit score could be a number below 509 as defined by Equifax or below 549 as indicated by Experian.
Generally, it indicates that you might not have the ability to repay your debt. This is a risk some lenders are not willing to take (rejected application). But, other lenders will offset the risk by asking for collateral or by charging higher rates and fees.
Personal loans for different uses
- Debt consolidation – Bundle your debt under one personal loan. In return, you get manageable payments and potential interest savings.
- Car repair – Fix your blown transmission or other essential car repairs.
- Holiday and travel – Expand your travel budget to cater for your dream vacation.
- Home loan deposit – Get the deposit you need to secure a home loan.
- Home improvement – Give your house a makeover without dipping into your savings.
- Wedding – Spread out the cost of your big day and create special memories.
- Medical – Get financial help to cover medical expenses.
- Dental – Make an appointment for your tooth filling, root canal or other dental procedure.
- Green – Embrace a greener lifestyle and reduce your carbon footprint with green projects for your home or business.
- Cosmetic surgery – Lower the high-cost bar of your cosmetic procedure. Popular procedures include liposuction, nose reshaping, tummy tucks, and facelifts.
- Credit card debt – Consolidate your debt and escape the vicious debt cycle of high-interest credit cards.
- Swimming pool – Upgrade your lifestyle with a swimming pool or jacuzzi for a more defined “at home” relaxation experience.
- Tax debt – Stay compliant with ATO by clearing away your tax debt.
- Rental bond – Move into your new place and pay for your rental bond at a budget-friendly pace.
- Legal fees – Get the legal help you need and pay for it at a later date.
- IVF – Cover the costs of in-vitro fertilisation cycles and fertility treatments needed to start your family.
- General-purpose – Use your lump sum for any approved purpose.
Personal loans for purchasing different types of assets
- Boat – Marine finance that covers purchases for fishing boats, yachts, and other similar vessels.
- Car – Car loans allow you to buy various new and used vehicles.
- Engagement ring – If you’re planning for happily ever after, you can finance your high-value engagement ring for that “wow” factor.
- Time-share – Invest in a time-share and enjoy the benefits when the holiday season rolls around.
- Jet-ski – Discover the freedom of open water with your watercraft purchase. Think Yamaha WaveRunner or perhaps a premium Kawasaki model.
- Equipment – Receive capital for buying or leasing business equipment.
Personal loans for specific individuals
- Self-employed – A viable finance option for Aussies operating as sole traders, freelancers, or contractors.
- Casual workers – A finance solution 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 – You can invest in stocks, property or other investments that offer high returns.
- Farmers – The funds allow Aussie farm businesses to boost growth and to streamline operations.
- Uber drivers – Car finance for individuals who want to drive for Uber.
- Students – Covers various costs associated with uni studies. For instance, you can pay for 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 with a valid Australian work visa.
Other types of personal loans
- Peer to peer – You borrow money from individual investors through market lending platforms.
- Online application – Obtained from online lenders who offer a quick and convenient application process. You can apply in the comfort of your home as long as you have an internet connection and a computer.
- Low doc – Requires a minimal number of documents to apply.
- Joint applicant – Involves a second borrower who shares the loan and responsibility for the loan with you. Adding a co-applicant to your personal loan can help you negotiate a better deal.
- Overdrafts -This line of credit ties directly 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 you reach the limit, you then make repayments to free up more credit (revolving line of credit).
Personal loans comparison in Australia
The personal loan comparison process involves looking at all sorts of loan features to find the best pick for your needs:
Interest rates
The best personal loan interest rate for you is simply the most affordable rate you can get. A lower rate trims your total costs down and keeps more money in your pocket. Therefore, it’s worth your while to compare as many similar options as you can. You can then choose the most attractive offer based on the interest rate plus other factors.
Comparison rates
When you check our product table, the advertised rate is shown next to the comparison rate. This makes it easier to spot low-interest credit with expensive charges and fees. Remember, the comparison rate showcases the interest rate plus all other standard fees.
Loan terms
Short term personal loans usually get paid off within 12 months. Standard loan terms range from 12 months to three or five years. Even longer terms of up to seven or ten years may also be available. Check to see if your desired repayment period falls within the limits of a particular offer.
If you prefer a greater cash flow, you can increase your term. While this reduces your monthly payment, you, however, pay more interest in the long run.
Loan amounts
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 limit. This ensures you only apply for relevant offers that match your needs.
Bear in mind that a bigger amount results in larger monthly payments. Likewise, your total costs will increase since you pay more interest.
Fees and charges
It’s a smart move to check the comparison rate. Even so, you also need to check for charges not included in the comparison rate. To illustrate, you only activate redraw fees when you use the facility, so they may be easier to overlook.
Monthly repayments
Use our personal loans repayment calculator to compare loans. This valuable tool shows your estimated monthly instalments. Hence, it helps you choose a repayment plan tailored to your budget.
Repayment flexibility
This applies to whether you’ll be able to repay the debt according to your preferences. Does your salary come in every week? Then you might want to make weekly repayments. Do you expect to come into some extra money down the line?
Then you should be able to make extra repayments at no additional cost. Find out if the loan has early repayment or early exit fees that can add to your debt.
Extra features
Personal loans have many variable features. You may find some beneficial, while others won’t apply to your situation. Your best bet is to look for unique features that improve your credit journey.
For example, a loan with a redraw facility gives you access to extra repayments you have already made. This can be a lifesaver when an emergency comes up. Still, you might prefer to preserve your cash flow instead of staying ahead on your payments. In that case, you might want a long term offer that also has lower monthly payments.
What are the requirements for personal loans?
Australian lenders generally use the following factors to define their lending criteria:
- Age: You must be at least 18 years or 21 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 credit to casual workers, pensioners, or the self-employed.
- Income: Typically, your income must be stable, regular, and above a certain monthly amount.
- Financial circumstances: Credit providers may also require details about your assets, liabilities, and expenses.
- Australian citizenship: Most lenders only offer credit 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 includes copies of your payslips, bank statements, and business or personal tax returns.
How to apply 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 money for?
- Do you want secured or unsecured debt?
- Do you prefer a fixed or variable rate?
- How much do you want to borrow?
- How long do you want the repayment period to be?
- Calculate your monthly repayments. Use our valuable tool to find out how much you can afford based on your term and amount.
- Compare personal loans. Use different factors to compare available credit options. It’s best to apply the filter to ensure you only get relevant offers.
- Make the application. Once you reach a decision, click the appropriate “Go to Site” button in the product table. Next, submit your online application on the lender’s website.
Frequently asked questions
What is a debt consolidation loan?
This is a personal loan that helps you to consolidate debt. When you take out a larger loan to pay off several smaller debts, you gather the debt under one account. Your debt then becomes easier to manage. You could also 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 allows you to withdraw any extra repayments you have previously made.
Where can I get the best personal loan?
You can find a suitable offer from various Australian credit unions, banks, online lenders, and peer lending companies. To find the best personal loan for you, compare products in our product table at the top of this page.
How do I make payments on a personal loan?
Most financial institutions will set up automatic direct debit for you. Other ways of paying your debt include bank transfers, ATM deposits, and BPAY. You can also check your contract’s terms and conditions, or login to your account to verify other important repayment details.
What happens if I can’t make repayments on my loan?
It’s best to reach out to the lender as soon as possible. Most lenders are willing to work out a suitable payment plan. However, if you leave it until it’s too late, the lender may take legal action against you. If you have secured debt, the lender can sell the car to cover their loss.
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 taking this approach, make sure the costs of refinancing won’t cancel the benefits.
What do I do if my loan application is rejected?
Find out why this happened before you apply again. You can ask the credit provider to supply a reason for the rejection. Common reasons include having bad credit and failure to meet specific requirements. Once you have a finger on the problem, take steps to improve your chances 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?
Applications you make usually appear on your credit report. For this reason, too many credit applications over a short period will hurt your score. Lenders are likely to view you as a person who takes on debt they can’t afford.
How can I get a better interest rate?
To get the best personal loan interest rate, you can opt for a secured or joint application loan. Also, improve your credit profile by making timely payments and fixing errors in your credit report. 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 loan?
Note that there’s never any guarantee for approval. However, you can still improve the odds by applying for a loan you can afford. Before you apply, use the tools provided on this comparison website to find the best option for your needs.
How do I find the best personal loan for me?
Use this guide to select the right features for your personal loan. 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 plan. For instance, you should be able to make extra repayments free of charge.
Are there any limits on how I will use the funds?
Some lenders may restrict how you use the funds. Generally, most personal loans are suitable for a wide range of purposes. If any limits exist, the lender will usually ask what you need the money for when you apply.
How do I reduce the total cost of my loan?
The best way to make your debt affordable is to compare loans to find the lowest rate possible. Paying off your debt quickly and borrowing less also ensures you pay less interest and fees in the long run.
Learn more about how personal loans work in this explainer video
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Dennis Graham is a seasoned finance professional working within Banking, Lending and Novated Leasing. An expert finance writer, Dennis combines industry insights with clear communication to deliver insights into financial products.
