What is a Personal Loan?
A personal loan is an amount of money borrowed from a lender, between $2,000 and $100,000, which is repaid in regular instalments for a period of between one and seven years. Personal loans can be secured or unsecured, and are used to finance a holiday, pay sudden bills or expenses, consolidate debt, or for any other personal expense.
To help you compare personal loans, we’ll look at the two main types offered in Australia:
- Secured Personal Loans
- Unsecured Personal Loans
Understanding how these two types work will also help you compare other types of personal loan that may be available to you.
How does a Personal Loan work?
A personal loan is an agreement between you and a lender in which the lender agrees to provide you with an amount of money that you repay over a specified time. Repayments include interest accrued on the principal amount. Interest rates are determined by the lender and agreed to when signing your agreement.
You can apply if you are:
- Over the age of 18; and
- An Australian Citizen or Permanent Resident; and
- Employed or have a regular source of income
Where to apply for a Personal Loan
You can apply for a personal loan with:
- Non-bank lenders
- Specialist finance lenders
- A personal finance broker
You can apply over the phone, online, or in person. Online lenders offer faster approval than traditional lenders, such as banks.
Depending on the personal loan lender you choose to apply with, approving your application can take anywhere from a few minutes to a couple of weeks. If speed is important, you may wish to consider an online lender first.
How to get a Personal Loan
If you meet the basic eligibility for a personal loan, you will then need to compare lenders and assess their individual approval criteria. You will need to provide personal identification and financial documents (usually your bank statements or recent payslips), as lenders will need to assess your financial stability and determine if you can service the loan amount.
To get a personal loan you will need to:
- Submit an application to a lender
- Meet the lender’s approval criteria
- Sign a loan contract and agree to the terms of the loan
The most important factor when gaining approval is to demonstrate your ability to repay the full loan amount to your lender. You can ensure your application is processed faster by preparing supporting documents before applying, including:
- Proof of identity - e.g. passport or driver's licence
- Proof of income - e.g. payslips, bank statements
- Details of any current debts or other loans
If you are applying for a secured personal loan, you will need to provide the lender with proof of your assets and details of any assets you wish to use as collateral.
If you are approved, you will then need to agree to a loan contract which will set out:
- The length of your loan
- Any initial and ongoing fees including in your loan
- The rate of interest applied to the loan principal
Self-employed Personal Loans
If you are self-employed, you’ll need to provide different documentation to lenders when applying for a personal loan. If you are using a broker, they will be able to advise on the specific documentation you will need to meet lender approval. In general, you will need to provide tax returns in place of employee payslips.
Personal Loans available in Australia
The most important thing to know before applying for a personal loan in Australia is to understand the difference between unsecured and secured personal loans. The primary difference between the two is in the use of security on the loan, which will affect the amount you can be approved for and the rates applied to your loan.
Unsecured Personal Loans
An unsecured personal loan doesn’t require any collateral - i.e. security such as your home or car. This is the easiest place to start when understanding how personal loans work, as unsecured personal loans can provide access to cash which you can use for almost any purpose.
The two main benefits of an unsecured personal loan are:
- The lack of security required for loan approval
- The freedom to use the money however you choose
The downside is that it will generally have higher rates than a secured personal loan.
Secured Personal Loans
A secured personal loan uses one of your assets as security. They are often used to purchase a car, but other types of assets can be used as well. You can use existing assets (such as your home or existing vehicle) as collateral, or you can use the asset you purchase with the funds.
The two main benefits of a secured personal loan are:
- The ability to access a greater amount of finance
- Generally lower repayments than unsecured loans
However, any asset you choose to use as collateral may be taken by the lender in the event you are unable to repay your loan, and sold to recoup any losses.
Secured Personal Loans vs Unsecured Personal Loans
|Secured Personal Loans||Can apply for a loan up to $100,000|
Lower repayments than unsecured loans
|Collateral can be repossessed by the lender and sold if you default on your loan|
|Unsecured Personal Loans||No security required for loan approval|
The freedom to use the money however you choose
|Higher rates and repayments than a secured loan|
Lower borrowing capacity than a secured loan
How to compare personal loans
To choose the right personal loan for your unique circumstances, you’ll want to compare a number of loan factors. As with comparing every other type of finance, these factors will vary from lender to lender. The three most important things you should consider when comparing are:
- Amount and Term
- Loan Fees and Charges or Penalties
- Interest Rates
Personal Loan Amounts
The maximum amount you can borrow will be decided by the type of loan you apply for, and banks often won’t approve an unsecured personal loan for less than $3,000.
Minimum and Maximum Amounts
|Minimum Amount||Maximum Amount|
Personal loans are usually offered for terms of between one and seven years. The length of your loan will directly influence the total amount you pay throughout the term. A longer term will mean you are allocating a greater portion of your initial repayments toward the interest accrued on the loan.
You can use our free Personal Loan Calculator to compare repayments over various terms.
Minimum and Maximum Terms
|Minimum Term||Maximum Term|
|1 year||7 years|
Fees and Charges
Loan charges include establishment fees, monthly fees and annual fees. The fees on your loan can make the advertised rate of a loan seem more appealing than it really is. You should also check if you will be charged fees for repaying your loan early or making additional repayments.
The four types of fees you should be aware of when comparing lenders for a personal loan include:
- Upfront costs - establishment fees and application fees
- Ongoing fees - annual fees and monthly fees
- Late payment fees - charged if you miss a payment
- Extra repayment fees - charged if you make early repayments to reduce the amount of interest payable on the principal amount
Choosing a personal loan without any fees or penalties for early repayments will allow you to repay your loan earlier and save on interest, either by lowering your monthly repayments or keeping your payments at the same amount while reducing the term of your loan.
How to choose a Personal Loan
Choosing a personal loan is easy. Choosing the right loan for your unique circumstances is much more complicated, and agreeing to a loan that isn’t the most suitable for your situation could mean paying more money over time.
For example, if you wish to purchase a car, you might want to first see if you qualify for a Secured Car Loan, not a Secured Personal Loan which you will use to buy a car.
While they may sound like very much the same product, they are not; a Secured Car Loan uses the entire loan amount to finance the purchase of a vehicle, while a Secured Personal Loan will still use the vehicle as collateral, but may provide additional funds for you to use for anything else - such as bill repayments, consolidating debt, or other personal expenses.
|Reason for personal loan||Type of Loan|
|Various Use and No Collateral||Unsecured Personal Loan|
|Various Use and Existing Collateral||Secured Personal Loan|
|Various Use and Purchasing Vehicle||Secured Personal Loan|
|Buying a Personal Vehicle||Car Loan|
|Buying a Business Vehicle||Chattel Mortgage or Equipment Finance|
|Consolidating debt without collateral||Unsecured Personal Loan|
|Fixed Loan Amount||Secured or Unsecured Personal Loan|
|Loan Amount you plan to increase||Line of Credit or Overdraft|
IMPORTANT: These examples are simply a guide and do not constitute financial advice. It is vital that you seek professional advice before choosing a loan, as only a trusted financial adviser can assess your personal circumstances.
If you are a Non-Resident, you can still apply for an Unsecured or Secured Temporary Resident Personal Loan. These will generally have higher rates and require more documentation, and there will be fewer lenders to choose from.
Personal loans are one of the most common types of personal finance, and are offered by the majority of lenders in Australia. For borrowers, understanding how they work and how to compare offers is a vital part of the pre-application process.
It’s recommended that before committing to any personal loan application, you engage a qualified financial adviser to assess your personal circumstances and advise on the most appropriate loan for your financial situation.
- Can be secured or unsecured
- Are available from various lenders with varying approval speeds
- Can be used for any personal expense or funding purpose
- Do not require a deposit
- Can be obtained from banks for lower interest rates
- Can be obtained from online lenders for fast approval timeframes
Personal Loan Pros and Cons
Personal Loan FAQ
How fast is a personal loan approved?
Approval speed on personal loans will vary between lenders. In general, banks have the slowest approval speed, while online lenders can offer same-day (in some cases, instant) approval on the majority of applications.
Can you buy a car with a personal loan?
You can consider an unsecured or secured personal loan if you're wishing to purchase a vehicle, however you may wish to consider a specific Car Loan product if you only plan to use the funds to purchase the vehicle.
Can you use a personal loan for a business?
You can use a personal loan for business expenses. However, there are many specific business loans which may be better suited to acquiring finance for your business - such as a chattel mortgage for business vehicles, or a business line of credit to access variable funding when needed.
How much can I borrow with a personal loan?
Generally, you can borrow up to $50,000 with an unsecured personal loan, and up to $100,000 with a secured personal loan. Most banks will not approve an unsecured loan of less than $3,000, and minimum and maximum loan amounts will vary between lenders.