What is a personal loan?
A personal loan is an amount of money borrowed from a lender (e.g. a bank), 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 consolidate debt, pay sudden bills or expenses, finance a holiday, or for any other personal expense.
To help you compare personal loans, we’ll look at the two main types of personal loan 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. Personal loan repayments include interest accrued on the principal amount. Interest rates are determined by the lender and agreed to when signing your personal loan agreement.
You can apply for a personal loan in Australia 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. Personal finance brokers operate all across Australia, and can help you compare your options whether you're in Melbourne, Sydney, Perth, Brisbane, Canberra, Adelaide, or Newcastle.
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.
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 licence
- Proof of income — e.g. payslips, bank statements
- Details of any current debts or other loans
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.
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 for a personal loan, 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.
Learn more about self-employed personal loans and how to make a low-doc application.
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
- 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. Learn more about unsecured personal loans in Australia.
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
Important: With a secured personal loan, 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 personal loans are:
- Amount and Term
- Fees, charges, and penalties
- Personal loan interest rates
Personal Loan Amounts
The maximum amount you can borrow will be decided by the type of loan you apply for. Banks often won’t approve an unsecured personal loan for less than $3,000, while some online lenders may offer personal loans with a minimum borrowing amount of $2,000. The maximum amount you can borrow with a personal loan is generally $100,000.
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 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.
Comparing your options to find a loan with the lowest fees will be an important aspect to consider when looking to refinance a personal loan.
Personal loan interest rates
To compare interest rates for personal loans, you can:
- Visit loan comparison sites to get an idea of what’s available.
- Visit lender websites and read reviews of their available loan products.
- Speak to a personal finance broker.
Most lenders will display the interest rates for their personal loans on their websites and other advertising. When comparing personal loan rates, there are a few things to keep in mind:
Compare like with like
Before comparing interest rates you should decide what type of loan you want — secured or unsecured, fixed or variable interest rate. Then when comparing loans make sure you’re only comparing the rates of the type of loan you’re after.
Risk-based interest rates
Personal loan rates that lenders advertise aren’t necessarily the rates you will be offered, largely due to how lenders use risk-based interest rates when assessing individual applications.
If a lender finds you a high-risk borrower, they may offer you a higher interest rate. If you have a bad credit history, have been bankrupt, or have an irregular income, this is something you may have to look out for.
Comparison rates express the true cost of a personal loan (Interest plus fees) as a simple percentage. When comparing various loan offers from multiple lenders, try to find the comparison rate to ensure you are accounting for all fees and potential charges.
Fixed rate vs variable rate personal loans
Whether fixed or variable interest rates are better for you will depend entirely on your goals and circumstances:
- If you plan to pay your loan off early to save on interest, a variable rate will generally not include extra charges or fees when making additional, early repayments.
- On the other hand, if you plan on repaying the minimum amount over the entire loan term, a fixed interest rate may be more suitable. Fixed rates are often a little lower than variable rates, and they provide a certainty which makes budgeting and meeting repayments easier.
Fixed interest rate personal loans
Fixed interest rate personal loans have the same interest rate for their entire term, or a set portion of the term. With a fixed interest rate, you know that your repayments will stay the same during the fixed period, which makes budgeting easier. You’re also protected against interest rate increases.
Fixed interest rates might be more restrictive. If you have a fixed interest rate, you may be charged fees if you make extra repayments, as well as a break fee if you pay your loan off earlier. Plus, if market interest rates decrease, yours will stay the same and you may miss out on savings. Fixed interest rates also tend to have shorter loan terms.
Fixed interest rate personal pros and cons
| || |
Variable interest rate personal loans
Variable interest rates increase or decrease in relation to the market, and can change at any time throughout your loan term. Variable interest rates will generally offer greater flexibility in making extra repayments or repaying the loan early without incurring fees.
Variable interest rates often don’t provide this certainty. Your repayments could change at any time and, if market interest rates increase, you could end up paying more interest.
Variable interest rate pros and cons
| || |
How to reduce interest on your personal loan
Reducing the amount of interest you pay is one of the easiest ways to reduce the total cost of a loan. Here are a few simple things you can do to make it happen:
- Choose a shorter term
The shorter your loan term is, the less interest you’ll pay. So if you can afford it, going for a shorter loan term could save you hundreds or thousands of dollars in interest over the life of a loan.
- Make extra repayments
If you have spare cash left over in your budget, or come into a windfall like a bonus at work, consider putting that amount toward your personal loan. Making extra repayments when you can help reduce interest charges on your loan and help you become debt-free faster.
- Secure a low fee loan
Paying fewer — or lower — personal loan fees can free up cash to make extra repayments. Always make sure you look closely at all personal loan fees and the comparison rate before applying.
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 personal loan that isn’t the most suitable for your situation could mean paying more money over time than you need to.
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
- 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.
The important difference for you, the borrower, is that a loan amount secured by an asset of equal value is low-risk lending. If you default on your loan, the lender can take possession of the asset, and sell it to recoup their losses.
If the loan is secured by an asset of lower value than the principal amount, the risk is much higher, as even if the lender reclaimed the asset, they would not be able to recoup all of their losses.
When choosing the right loan for the right situation, low-risk lending will have lower fees and lower interest rates (which means you’ll pay less overall), while high-risk lending will have higher fees and higher interest rates (which means you’ll pay more than you might need to).
|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||Debt Consolidation 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 personal loans work and how to compare personal loans 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.
Personal Loans in Australia:
- 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 want 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.
How can I compare personal loan interest rates?
The best way to compare personal loan interest rates is to shop around. Use comparison sites, speak to a broker or visit the websites of lenders you’re considering and check for yourself. Use the comparison rate to compare personal loans as this expresses the true cost of the loan.
Is a fixed or variable rate personal loan better for me?
Whether a fixed or variable rate is better for you depends on your circumstances and your goals. If you want to pay your loan off early without incurring extra fees, a variable rate loan may be the best option. If you want to pay the minimum amount and keep your repayments the same a fixed rate may be better.
How can I pay less interest on my personal loan?
To pay less interest on your personal loan, pay the loan off faster, make extra repayments and make sure you secure a loan with low fees.
Which personal loans have the lowest interest rates?
Generally secured personal loans have lower interest rates than unsecured personal loans. That’s because lenders consider them to be lower risk.