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If you need some flexibility with your finances, a personal loan with a redraw facility might be the answer. With the option to access your repaid funds, these loans can offer a financial cushion when the going gets tough. Let’s delve deeper into how personal loans with a redraw facility work and whether they could be the right choice for your financial needs.
What is a personal loan redraw facility?
A redraw facility on a personal loan enables you to withdraw money from any additional payments you make on the loan. Your extra repayments can be accessed when needed throughout your loan term if you need access to further funds. This flexibility is popular with many borrowers, as it saves them from having to apply for another loan if they find themselves short on cash.
Using the redraw facility does not increase the overall amount of the loan as you are not withdrawing more than you borrowed – you are simply accessing funds accrued from additional payments on your loan.
Here’s a basic example of how a personal loan redraw works:
You take out a $10,000 loan to be paid back over four years in monthly instalments. Your minimum monthly repayment, which includes both principal and interest, is $250. However, you decide to make an additional $50 payment each month towards the principal amount. Over six months, this amounts to an extra $300 in repayments.
With the redraw facility on your loan, you can access the extra $300 if you need it, for whatever reason. This additional payment doesn't affect your loan term or original repayment amount. You can withdraw the $300, use it and your total loan amount remains at $10,000.
How do I access the redraw facility on my personal loan?
Redraw facilities are not available on all loans, so the first step is to identify personal loans that offer this feature. They are generally available on variable rate personal loans but if you have your heart set on a fixed rate personal loan, you might find that your lender doesn’t offer a redraw facility.Â
The particulars of how to use your redraw facility will vary between different lenders, as each one is unique when it comes to how they run their redraw facilities. However, for the most part, this will function simply: you’ll contact your lender and request to withdraw funds from your facility, which they’ll accept provided it meets their requirements for doing so. Because these are funds you’ve already paid towards your loan, you don’t need to go through an extensive application process to access them.
It’s worth noting that there’ll be a set of minimum criteria imposed on your ability to redraw funds by your lender. Some lenders will impose a minimum redraw amount while others may charge fees to take out money or for making additional repayments and paying out your loan ahead of schedule. You should always bear this in mind when selecting your loan, as fees can add up over time if you plan on actively using your facility regularly.
What are some of the pros and cons of redraw facilities on personal loans?
Having and using a redraw facility on your personal loan can offer you a number of benefits:
- Access funds when you need them: enjoy the flexibility of being able to withdraw extra money when you need it without the rigmarole of applying for another loan.
- Pay out your loan earlier: in providing potential funds for your future self, you’re also actively paying down your loan faster if you choose not to redraw.
- Save on interest with repayments: by making extra repayments, you can reduce your loan balance more quickly, shortening the loan term and thus reducing the amount of interest charged overall.
- Improve your credit score: consistently making payments on time as well as making extra payments could have a positive effect on your credit score.
However, on the flipside there are some limitations you may encounter when using a redraw facility:
- Fees may apply: you’ll always need to check that your lender doesn’t charge fees for the use of their facility, as these could end up costing a significant amount.
- Interest on redrawn amounts: each time you withdraw money, you increase the amount you owe on your loan and with it the overall interest you’ll be charged.
- Redraw restrictions: some lenders may impose minimum redraw limits or have different rules for taking out money online or in-branch, potentially meaning you are unable to redraw the amount you want. Â Â
- Not offered on all loans: not all personal loans offer a redraw facility, particularly fixed-rate loans, so it is important to check with lenders before applying.
More of your questions about redraw facilities on personal loans
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Written by Fact checked
This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
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Approval for personal loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
