What is a Personal Loan and How Do They Work in Australia?
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TL;DR
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What is a personal loan?
A personal loan is a type of loan that lets you borrow a lump sum of money from a lender, then repay it over an agreed period in regular instalments.
In Australia, personal loans are commonly offered by banks, credit unions, and online lenders. They’re often used for bigger expenses that would be hard to pay for all at once, such as car repairs, moving costs, medical expenses, travel, or debt consolidation.
Unlike a credit card, where you can keep borrowing up to a limit, a personal loan is usually a one-off amount. Once it’s approved and paid out, you repay that specific amount over time.
How does a personal loan work in Australia?
At a basic level, a personal loan works like this:
- You apply to borrow a set amount.
- The lender reviews your application and checks whether you can afford the repayments.
- If approved, the funds are paid to you.
- You repay the loan in regular instalments over the loan term.
- Your repayments usually include the amount borrowed, plus interest and any relevant fees.
That sounds simple enough, but there are a few parts worth understanding before you sign anything.
How much can you borrow?
This depends on the lender and your circumstances. Many personal loans in Australia start from around a couple thousand dollars and can go much higher, depending on the exact product and the lender’s assessment.
How much you’re approved for may depend on things like:
- Your income.
- Your regular expenses.
- Existing debts or financial obligations.
- Your credit history.
- Whether the loan is secured or unsecured.
A bigger loan amount may sound appealing, but borrowing more than you need can increase the total cost unnecessarily and add extra financial pressure in the long run.
How long do you repay a personal loan for?
The time spent paying off a personal loan is called the loan term. Personal loan terms often run from 1-7 years, though this varies by lender and type of loan.
A longer term can reduce the size of each repayment, but it may also mean you pay more interest overall. A shorter term may cost less in total, but the regular repayments can be higher.
What do repayments look like?
Repayments are usually made weekly, fortnightly, or monthly. Some lenders offer more flexibility than others.
Your repayment amount will depend on:
- The amount borrowed.
- The interest rate.
- The number and type of fees.
- The length of the loan term
This is why two separate loans with the same advertised rate can still end up costing significantly-different amounts overall.
What’s the difference between secured and unsecured personal loans?
This is one of the first distinctions you’ll come across.
Secured personal loans
A secured personal loan is backed by an asset, such as a car or a house. If you can’t meet the repayments, the lender may have rights over that asset.
These loans may come with lower interest rates because the lender is taking on less risk.
Unsecured personal loans
An unsecured personal loan doesn’t require you to offer an asset as security. Because the lender is taking on more risk, the interest rate may be higher.
These are common for general expenses, debt consolidation, or personal use.
For many borrowers, unsecured personal loans are simpler, but they can also be more expensive depending on the rate and fees.
What’s the difference between fixed and variable interest rates?
Fixed rate personal loans
With a fixed rate, your interest rate stays the same for the life of the loan. That means your repayments are usually more predictable.
This can make budgeting easier, especially if you like knowing exactly what’s leaving your account each pay cycle and when.
Variable rate personal loans
With a variable rate, the interest rate can go up or down over time. That means your repayments may change too.
Sometimes variable rates start lower than fixed rates, but the trade-off is less certainty. You don’t know exactly if or when the rate will be changed and how much you may end up paying.
A good place to start is thinking about whether you value predictability or flexibility more. But this is just general information, please make sure to talk to a licensed financial adviser if you want more information relating to your individual circumstances.
What can a personal loan be used for?
Personal loans can be used for a wide range of expenses. Common examples include:
- Consolidating existing debts.
- Paying for car repairs.
- Covering moving costs.
- Funding home repairs or improvements.
- Paying for medical or dental costs.
- Covering travel or education expenses.
Some lenders place restrictions or caveats on what the funds from a loan can be used for, so it helps to check the loan terms.
It can also help to consider whether the expense is a planned cost, a one-off need, or part of a recurring money pattern. That can give you a clearer sense of whether a personal loan is the right fit.
What does a personal loan cost?
The cost of a personal loan is more than just the amount you borrow, and is generally unique to the borrower. Depending on the lender, the total cost may include:
- Interest charges
- Establishment or application fees.
- Monthly or ongoing account fees.
- Administrative fees.
- Late payment fees.
- Early repayment fees.
That’s why it helps to look at the comparison rate as well as the advertised interest rate. The comparison rate is the true cost of a loan, combining the interest rate and all fees into a single figure, helping you understand the true cost of a loan. Make sure to read the loan contract carefully to know exactly what you'll be paying.
How do lenders decide whether to approve you?
When you apply for a personal loan in Australia, lenders generally look at whether the loan is likely to be affordable for you.
They may assess:
- Your employment and income.
- Your bank statements.
- Your current spending.
- Your rent or mortgage commitments.
- Other loans, credit cards, or buy now pay later accounts you have.
- Your credit history.
This doesn’t mean approval is guaranteed just because you meet the basic criteria. Every lender has its own policies and checks.
If you’re comparing borrowing options, it can help to be realistic about what you can comfortably repay, not just what you may be approved for.
When might a personal loan make sense?
A personal loan may be worth considering when:
- You need to cover a larger one-off expense.
- You want structured repayments over time.
- You’re consolidating higher-interest debts into one regular repayment.
- You’ve planned the expense and understand the total cost.
For example, if you need to pay for a major car repair or merge several existing debts, a personal loan may offer more structure and better repayments than using a credit card or other financial options.
When might a personal loan not be the best fit?
A personal loan may be less suitable when:
- You only need a small amount for a short period.
- You’re already struggling to meet current debt repayments (you don’t want to add more).
- The ongoing repayment commitment could stretch your budget too far.
- The expense isn’t essential or urgent and could be delayed.
For smaller, short-term gaps, there are a variety of other options on the market that might be a better fit. Options such as a Beforepay Pay Advance, designed to help you cover expenses between pay cycles in a fair and affordable way.
Are personal loans the same as payday loans?
No. They’re generally different products.
Personal loans usually involve larger amounts and longer repayment terms, and lenders generally carry out affordability and eligibility checks before approval.
That said, not all borrowing products are equal. If you’re comparing options, it helps to look closely at the total cost, repayment structure, fees, and how the product fits your needs.
Balanced comparisons matter here, especially if you’re weighing up the many different short-term borrowing options.
A personal loan is a personal choice
A personal loan is one of the more common ways Australians borrow for larger expenses, but it’s not something to rush into just because the repayments look manageable on paper.
The key is understanding how it works, what it will really cost, and whether it fits your budget and your reason for borrowing. A personal loan can be useful in the right situation, but the right situation is different for everyone.
Looking for more information on personal loans? Read our guide to comparing a pay advance and personal loan.
Or if you’re just looking for tips on managing repayments, bills, and other expenses, consider taking a gander at our guide to different budgeting planners.
FAQs
Is a personal loan a good idea?
There’s no blanket answer to this as it depends on your situation. A personal loan may be useful for a larger planned expense or for consolidating debt, but it’s still important to check the total cost and whether the repayments fit your budget.
How long does a personal loan take to be approved?
Approval times vary by lender. Some lenders offer faster decisions than others, but timing can depend on the information you provide and the checks involved.
Can you pay off a personal loan early?
Sometimes, yes. But some lenders may charge fees or conditions for early repayment as a way to recoup lost income from interest, so it’s worth checking the loan terms first.
Do personal loans affect your credit score?
Applying for a personal loan may affect your credit file, and your repayment history can also play a role over time. Missing repayments can have negative consequences.
What’s the difference between a personal loan and a credit card?
A personal loan is usually a fixed lump sum repaid over a set term. A credit card is a revolving line of credit you can continue to use up to a specified limit.
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