A personal loan is money you borrow from a bank, credit union or online lender and pay back in regular instalments over an agreed term, with interest. The rate you are offered depends on your credit history, your income and what you already owe.
You can use a personal loan for almost anything, and you don't have to stick to one purpose. People use them to pay for a car, a wedding, a holiday or a renovation, or to roll several debts into one.
What people use personal loans for
A personal loan gives you the money up front and a fixed plan to pay it back. These are the most common reasons people borrow:
- Debt consolidation. If you have several debts, such as credit cards, one personal loan at a lower rate can pay them off and leave you with one repayment.
- Home renovation. A loan can pay for a remodel, new appliances or urgent repairs. An unsecured loan doesn't put your home up as security.
- Emergency costs. An accident, medical bills or a funeral can cost more than you have saved, and a loan can cover the gap.
- Large purchases. A car, a holiday or a wedding can be paid for now and repaid over a set term, instead of saving for years first.
- Education. Course fees and living costs add up, and a loan can spread them out.
- Starting a business. Some people use a personal loan to get a business going. Once a business is trading, a business loan is usually the better fit.
What lenders look at
Every lender has its own rules, but you'll usually need to be 18 or older and an Australian citizen or permanent resident. Some lenders also lend to temporary residents, with extra conditions. All lenders will ask about:
- Income. You'll need a regular income, so the lender can see you can keep up the repayments.
- Employment. Full time work helps, but part time workers and the self-employed can also apply. Some lenders consider people on government payments.
- What you already owe. The lender adds up your other debts, including credit card limits, to check you can afford a new one.
- Your credit history. A clean history usually gets a lower rate and a larger amount.
Licensed lenders must check that a loan is not unsuitable for you before they approve it.
Types of personal loans
Most personal loans are unsecured with a fixed rate, but there are other types, and the right one depends on why you're borrowing.
Secured or unsecured
An unsecured loan doesn't need an asset as security. Your rate depends mainly on your credit history and what you already owe, and rates are usually higher.
A secured loan uses an asset, usually the car or other thing you're buying, as security. The lender can repossess and sell it if you don't repay, so the risk is lower for the lender and the rate is usually lower too.
Fixed or variable rate
A fixed rate stays the same for the whole loan, so your repayments never change and are easy to budget for. The catch is that you won't benefit if rates fall, and some lenders charge a fee to repay early.
A variable rate can rise or fall during the loan, usually in step with the Reserve Bank's cash rate. Variable loans often allow extra repayments without a fee, which suits you if you want to pay the loan off faster.
What else to compare
Once you've chosen secured or unsecured, and fixed or variable, compare these:
- The interest rate and the comparison rate.
- The loan terms on offer. A longer term means lower repayments but more interest in total.
- The fees: the establishment fee, any monthly or annual fee, late payment fees and any fee to repay early.
- Whether you can make extra repayments or repay the whole loan early, and what that costs.
- Whether the lender shows you your rate with a soft check, which doesn't appear on your credit report.
The comparison rate
Every personal loan shows two rates. The interest rate is what the lender charges on the amount you borrow. The comparison rate adds the standard upfront and ongoing fees, shown as one yearly rate, so you can compare the cost of two loans on the same footing.
By law, the comparison rate for a personal loan is worked out on an example loan of $30,000 over 5 years. It's true only for that example and may not include every fee, so use it as a guide and read the fees as well.
Pros and cons
Pros
- Lower rates than most credit cards. If your credit history is good, the rate can be much lower than a card's.
- Use it for almost anything. A car repair, a renovation or a holiday all qualify.
- Larger amounts. You can usually borrow more than a credit card limit allows.
- A set end date. Regular repayments over a fixed term mean the debt is gone when the term ends.
Cons
- Early repayment fees. Some loans, mostly fixed rate ones, charge a fee if you pay early.
- Upfront fees. Many loans charge an establishment fee when the loan is approved, and some add a monthly fee.
- A higher rate than advertised. Many lenders set your rate from your credit history, so you may be offered more than the lowest rate shown.
- Scams. Fake lenders exist, so check that a lender holds an Australian credit licence on ASIC's Professional Register before you apply.
Alternatives to a personal loan
Before you apply, think about whether one of these suits you better:
- A balance transfer credit card. A card with 0% interest for a set time on balances moved from other cards can help pay down existing card debt, if you clear it before the offer ends.
- A credit card with 0% on purchases. For a one-off purchase you can repay within the offer period, this can cost less than a loan.
- An overdraft or line of credit. You only draw what you need and pay interest on what you use, not on the full amount.
- Using your home loan. If you have equity, you can borrow against it at a home loan rate. But you'd be paying off a short-term cost over decades, which can cost more in total.
How to choose the right loan
Ask yourself these questions:
- Do I want a fixed rate or a variable rate?
- Do I want a secured or unsecured loan?
- How long do I need to repay it?
- Which loan that fits all of these has the lowest comparison rate?
- Am I happy with the lender's service and how it handles complaints?
See typical rates and fees across the market in our personal loan statistics.
Tips before you apply
- Check your credit report. You can get a free copy each year from each credit reporting body, such as Equifax and Experian. Fix any mistakes and catch up on overdue payments first.
- Compare the comparison rate. It shows the cost of the standard fees as well as the interest.
- Borrow only what you need. A larger loan than you need costs more and is harder to repay.
- Get a rate quote first. Many lenders show your rate with a soft check, so you can compare before you apply.
- Pay on time. On-time repayments avoid late fees and build a good repayment history.
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