Personal loan tips for first time borrowers

The contents provided on this page are for informational purposes only and do not constitute financial advice. Consider your personal circumstances and objectives before making any financial decisions.

Looking for quick cash? Whether it's for your wedding, student loan, or home improvements, a personal loan could help you regain control over your finances.

But remember, like any financial decision, it requires careful thought.

If you're new to borrowing, it can feel overwhelming. So we're here to guide you through it! We've compiled tips and strategies to help make your borrowing experience as smooth as possible, so you can make the best decision for you and your situation.

1. Assess the need for a personal loan

Getting a personal loan is a big decision, but it could be a smart choice with careful thought. Before jumping in, take a moment to figure out why you need the loan and if it's the right choice for you. Here are some friendly tips to help you make sure your decision fits well with your financial goals.

Common reasons for seeking a personal loan

Understanding the specific reason for your personal loan could help you find better options for financing the problem. Some examples include

Home Improvement

You might consider a personal loan for home improvements to help you fund renovations or repairs and enhance the value of your property. It's crucial to estimate the costs accurately and evaluate whether these improvements align with your overall financial goals.

If you’re looking for additional support, you could also check the grants provided by the Australian government for specific home improvement projects.

Emergency Expenses

In situations where unforeseen circumstances like medical bills or urgent car repairs arise, a personal loan can be a lifeline. While establishing an emergency fund is the first line of defence, sometimes it might not be sufficient. In such cases, ensure you only borrow what is absolutely necessary to cover the immediate needs.

Consider using Beforepay to help you boost your cash so you can cover those unexpected expenses with ease and control. 

Education Expenses

Personal loans are often sought to cover educational expenses, such as tuition fees and books. Before resorting to a personal loan, explore alternative funding sources such as scholarships and federal aid. This can help alleviate the financial burden associated with education.

You could also check if you are eligible for any government assistance programs for education. 

Special Events

Financing special events like weddings or vacations with a personal loan is a common practice. However, it's essential to differentiate between wants and needs. Consider alternative ways to fund non-essential events, such as crowdfunding or hosting fundraising events, like a garage sale or bake sale. This approach ensures that your financial decisions align with your overall goals.

Benefits of setting a clear goal for your personal loan

Once you're certain about getting a personal loan, the next step is to set a clear goal for the money. This could help make sure you know exactly what parts of your expense are being covered by the loan. 

Setting a clear goal can help you from over-borrowing, some other benefits also include: 

Budgetary Control

Setting a clear goal helps you put a price tag on your plans, deciding precisely how much you need for your loan. This avoids unnecessary financial stress, providing a focused approach, especially when dealing with expenses like home renovations.

Interest Savings

If your aim is to cover study costs, knowing the exact amount needed enables you to borrow only what's necessary. The real savings come in when you make timely repayments, avoiding extra interest charges

Focused Repayments

When you have a clear goal, it's easier to stay motivated and pay your repayments on time. This is because you understand the importance and purpose of the money you borrowed. You know how this money can help you achieve your goals or relieve the burden of financial stress.

3 questions to ask yourself before taking out a personal loan

If you’re still unsure whether taking out a personal loan is the right option for you here are 3 questions to ask yourself. 

  1. Is the loan absolutely necessary?
  2. Can I afford the monthly payments?
  3. Have I explored alternative funding sources?

2. Determine the right amount to borrow for a personal loan

Taking out a personal loan is not just about obtaining funds; it's about securing the right amount that meets your needs. Here are some tips and things to consider to help you figure out what is the right amount for you. 

Conduct a detailed cost analysis

Before finalising the loan amount, create a comprehensive list of expenses related to your goal. Explore budgeting tools like YNAB (You Need A Budget) or Beforepay to analyse and plan your expenses.

Consider future financial goals

Account for your long-term financial aspirations when deciding the loan amount. You can use calculators like those available on MoneySmart to project future financial scenarios based on different loan amounts.

Plan for the unexpected

Include a buffer for unexpected expenses or changes in your financial situation. Financial experts often recommend having an emergency fund equivalent to three to six months' worth of living expenses.

Stay within your means

Assess your monthly income and expenses to determine a comfortable repayment amount. You can use online tools such as MoneySmart Budget Planner to evaluate your repayment capacity.

Seek professional financial advice

Consult with a financial advisor to ensure your loan aligns with your overall financial plan. Consider using ASIC's Financial Advisers Register to help you find licensed financial advisors in Australia and checking out our financial support and resource page.

3. Understand the criteria for a personal loan 

Navigating loan eligibility can be complex; simplify the process by understanding the key terms and phrases you might come across when exploring your options and eligibility for a personal loan!

Credit score: A numerical representation of your creditworthiness.

Income verification: Providing proof of your income, often through pay stubs or tax returns.

Debt-to-income ratio: The percentage of your income used to cover debt payments.

Collateral: Assets offered to secure the loan, which the lender can seize if you default.

Co-signer: A person who agrees to be responsible for the loan if the borrower fails to repay.

Loan term: The duration for repaying the loan, typically in months or years.

4. Find the right personal loan option for you

There are many factors that contribute to the type of loan you should consider getting. These are important to understand as it can impact the costs associated with borrowing money and the ease with which you can pay it back. 

Here are 3 factors to double check when applying for a loan. 

Check interest rates

Check if the loan has a fixed or variable interest rate. Fixed rates stay the same, offering stability. Variable rates can change based on the market, meaning you might pay more or less interest than the initial amount.

Check fees associated with loans

Examine any upfront fees, processing fees, or hidden charges. Be aware of the total cost of the loan, including fees, before committing, to ensure you have the means to meet your repayments and avoid penalties such as interest charges.

Check loan terms available

Understand the duration and flexibility of repayment options and choose a term that aligns with your financial goals and ability to repay. If you find you don't need a substantial amount, you could consider flexible options like Beforepay.

If you need extra help on comparing different loan options here are some websites you can try: 

Personal loans can be a handy tool if used for the right reasons. Make sure you understand the terms and conditions of your loan, stick to timely repayments, and use the loan for its intended purpose. When handled wisely, a personal loan can bridge financial gaps without putting your financial well-being at risk.

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