What is a Personal Loan?

Find out more about personal loans and how to compare them here before you plunge into your application.

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, updated on October 4th, 2023       

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What is a personal loan?

A personal loan is a type of financing offered by lenders designed for personal use; that is, you can take out a personal loan and use it however you like. This is what sets it apart from loans designed for more specific uses, such as car and home loans.

These loans follow the same structure as most other types of finance: you apply for a set amount, are approved by your lender (provided you can afford it) and receive a lump sum. You repay this figure on a monthly, fortnightly or weekly basis (depending on your preferences) over a period of between one and seven years along with interest and fees.

Personal loans in Australia are able to be used in a similar way to credit cards but come with several distinct advantages. Because they charge lower interest rates, they’re more suitable when it comes to accessing greater finance amounts (such as $5,000 or more). Credit cards would charge a substantial amount in interest if you’re unable to have your balance fully repaid each month.

Additionally, the fact that their repayments are set across a finite loan term gives you a more solid idea of your monthly commitments to your finance and make it more difficult to let your debt spiral in the same way that credit cards can if you’re not careful.

What are the different types of personal loans?

There are many types of personal finance that you’ll need to compare when tossing up which offer is best for you. Some of the main loans to consider are:

Secured personal loan

Secured personal loans involve you putting forward a valuable asset to act as collateral on your loan, such as a car, boat, caravan or another vehicle. This means that, in the unlikely event that you default on your loan, your lender can sell off the collateral to recoup some or all of the funds lost. There are a number of key benefits to secured loans, with the primary two being their lowered interest rates and their increased borrowing power up to $100,000. If you’re able to keep on top of your repayments, however, there’s not even a remote risk of losing your asset.

Unsecured personal loan

Unsecured personal loans don’t require any sort of collateral to be attached to them, hence their name. While they can’t boast the same borrowing power (capped at $75,000) or interest rates that secured loans can, they’re far more accessible in general. Because assets have to be deemed suitable to serve as collateral, it may count out many potential borrowers whose car or boat isn’t in good enough condition or is too old, for instance. There are also more options available in the market and are processed more quickly, due to the lack of security assessment.

Fixed rate personal loan

You can also choose between loans based on the structure of their interest rate. Fixed interest is the option most common on personal finance. These involve locking in your rate at the beginning of the loan, after which they remain the same throughout the entirety of your repayment term. The primary benefit of this is that your repayments will be stable and consistent across your term, meaning you can more effectively budget around these costs month-to-month. Because they remain unmoving, they also protect you against any rises in interest rate until you’ve paid out your loan in full.

Variable rate personal loan

In contrast, variable rates are left open to fluctuation throughout your personal finance term. The main reason why someone may wish to choose a variable rate on their personal loan is to take advantage of interest decreases across their term and potentially save money overall. However, options are more limited when it comes to variable rates and they’re typically offered at a higher base rate than fixed interest. As such, it’s important to assess what your preferences are for your personal finance deal when deciding on either fixed or variable interest.

How to apply for a personal loan in Australia

Top tips for comparing personal loans

Find the lowest interest rate

Interest rates are a crucial aspect of the comparison process. They’re likely to be the most significant factor in shaping the cost of your personal loan, so you should always keep them front of mind when comparing loans. The lower your rate, the less you’ll pay on your loan; even increasing the rate from 8% p.a. to 9% p.a. on a $30,000, five-year loan would cost you over $850 in interest over the course of your repayments.

Compare the different fees charged

Fees also add to the cost of your loan, so they’re another important aspect to consider. There are several different fees that may apply to your loan, but the main two are the establishment fee ($0 to $595) and ongoing fees ($0 to $10 per month). We have lenders on our panel who don’t charge either of these fees, while others will only charge one or the other. Reducing your ongoing fees by just $5 could save you $300 over a five-year term.

Look for free early repayments

Where possible, you should also prioritise loans which give you the freedom to pay above and beyond the minimum. By doing this, you can pay your loan off sooner and save a significant amount of money in the process. Many of our lending partners don’t charge in this area, encouraging borrowers to save on interest. For example, paying $100 above the minimum on a $30,000, five-year loan at 8.5% p.a. would save just over $1,200 in interest alone.

Ensure your preferred term is offered

One of the most important parts of ensuring your loan is comfortable for you to repay is giving yourself the right loan term. Not all lenders will offer the full scope of one to seven years: some might offer two or three-year minimums, while others may cap them at a maximum of seven. It’s imperative that you find a lender who offers the term that’s most manageable for you, as this will also help your chances of approval.

Assess minimum and maximum loan amounts

Similarly, you should ensure that your chosen lender can accommodate the size of loan that you’re looking for. You can borrow anything between $2,000 and $75,000 with an unsecured loan, with lenders offering different minimums and maximums. It’s always useful to enter the loan process with a clear idea of the amount that you need to borrow, as that will help you decide on lenders to go with based on their respective parameters.

Consider whether you’re eligible

Finally, above all else, you’ll need to ensure that you’re eligible to be approved for your loan. There are a number of basic criteria that you’ll be required to meet in order for your lender to sign off on your loan, with the main ones being:

  • You must be 18 years or older
  • You must be a citizen or permanent resident
  • You must be employed in a stable position
  • You must be earning at least $20,000
  • You mustn’t have any history of defaults or bankruptcy

Common personal loan queries answered

Are there personal loans for self-employed workers?

Yes – borrowers who run their own businesses and work for themselves are able to apply for personal finance in the same way as any other standard employee would be. Applications remain the same, with the only difference being that the requirement for payslips is replaced with your last two years’ worth of tax returns. With these in tow, you can be approved without any hassle.

Am I able to apply for a loan with a co-borrower?

Yes – applying jointly with your partner is a great way to maximise your borrowing power, reduce your monthly repayments and your interest rate. By having a second borrower on your application, your lender will have more confidence in your ability to comfortably repay your loan.

This is because, in the event that one income stream falls through, there’s a second to fall back on to continue payments. This is especially useful if you’re looking to make a shared purchase or consolidate debt together.

What is a line of credit personal loan?

A line of credit personal loan is structured similarly to a credit card: you’re approved for a set amount of money, which allows you to withdraw from your account up to that limit. This type of finance is flexible in that you can take on your required funds when you need them and can essentially repay them at your leisure.

You also only pay interest on the funds that you withdraw, rather than the lump sum you’d receive on a standard loan. However, rates for these loans are usually much higher than other personal loans in Australia.

Is an overdraft different to a personal loan?

Yes – overdrafts are similar to lines of credit. They’re attached to your bank account and enable you to withdraw beyond $0 up to a certain limit. Like lines of credit, they only charge interest on the amount withdrawn, don’t have set repayments and come with a higher interest rate.

However, these are generally more useful for when you need quick extra cash in a pinch, as your limit is likely to only be an absolute maximum of $20,000. The interest rate makes them less suitable for large sums that take a while to repay.

Can I get a personal loan if I have bad credit?

Yes – we’re partnered with a range of flexible lenders who offer personal financing options to borrowers with bad credit. These loans have greater restrictions when it comes to how much you can borrow and the term over which you can repay it, maxing out at $12,000 with loan terms of two to three years. They also come with higher interest rates, as bad credit borrowers are seen as a greater risk overall.

Are Centrelink payments accepted as income on my application?

Yes – we’re partnered with lenders who accept certain Centrelink benefits as part of personal loan applications, whether you’re a low income-earner or otherwise. These are generally restricted to payments that are stable, consistent and unlikely to cease unexpectedly.

For this reason, aged, disability, carers’ and single parent payments are all accepted. JobSeeker (on its own), Youth Allowance, Austudy and ABSTUDY aren’t accepted, as they’re contingent on fluid factors like your age, employment and study status.

What happens if my application is unsuccessful?

This depends on why it was unsuccessful. If you applied for an amount your lender believed to be too much, but your application was otherwise accepted, they’re likely to return to you with a counteroffer of an amount they’re comfortable approving you for. If you were denied based on not meeting your lender’s criteria, you’ll be notified as such shortly afterwards, and the enquiry will be recorded on your credit file.

Helpful personal loan guides