What is a personal loan?

A personal loan is a type of loan granted to an individual for personal use. You can use the funds for any purpose, such as debt consolidation, home improvement, or a major purchase.

Suppose you’re considering taking out a personal loan. In that case, it’s essential to understand your options to make the best possible decision for you and your circumstances. Unfortunately, not all loans are created equal, and without the proper knowledge, it’s easy to commit to something unmanageable—leading to missed repayments and significant financial consequences.

This handy guide will help you understand everything you need about personal loans and the types you can apply for.

what is a personal loan and how does it work

How does a personal loan work?

Lenders may have different processes, but usually, when taking out a personal loan, you’ll be required to agree on the amount of money you’d like to borrow and the period in which you will pay it back (usually between one to seven years). You may also need to provide evidence that proves your ability to repay the loan. Generally, this would include providing proof of income (e.g. payslips) or assets (e.g. property, car).

Once approved, you’ll receive the total loan amount in a lump sum and then be required to make regular repayment instalments of the same amount for the duration of your agreed loan term.

What is the step-by-step process of getting a personal loan?

  1. Research and compare different personal loan providers. Focus on the fees, interest rates and loan terms offered.
  2. Calculate how much money you’ll be able to borrow and still make timely repayments.
  3. Decide on the amount of money you’d like to borrow and the term in which you wish to pay it back.
  4. Gather all your relevant financial documents, such as payslips or asset information.
  5. Apply for a personal loan with the lender of your choice.
  6. Await approval from the lender.
  7. Receive the loan money and start making regular repayments.
  8. Keep up with your monthly payments until you fully repay the loan.

How is a personal loan given in Australia?

A personal loan is granted in the form of money given to you by a lender. The funds may be paid into your bank account, held as a balance with the lender (such as credit card loans), or given as a pre-paid card.

The loan terminologies you need to understand

When researching personal loans, you’ll come across various financial terms and phrases that are important to understand. Below are some of the most common ones

  • Interest rate. The interest rate is a percentage figure representing the cost of borrowing money from your lender. It’s usually expressed as an annual percentage rate (APR).
  • Repayment period. This is the time you have to pay back your loan, usually from one to seven years.
  • Loan term. This is the amount of time that a loan has been granted for, and it can vary depending on the type of personal loan you take out.
  • Principal. This is the amount of money you’ve borrowed, and it does not include any interest or fees.
  • Fees. Depending on the loan, lenders may charge additional fees such as an establishment fee, a service fee and/or an early repayment fee. Consider these when deciding which personal loan to get.
  • Borrowing limits. Lenders often have a set amount of money for each customer. This is known as the borrowing limit.
  • Default. This is known as defaulting on a loan if you fail to make agreed repayments. This can have serious consequences and can damage your credit score, so it’s important to stay up-to-date with your payments.
  • Collateral requirements. Some personal loan providers may require you to use an asset as collateral for your loan. This means that if you cannot pay back the loan, your asset can be seized and used to repay the debt.
  • Features. Depending on the provider, personal loans often come with additional features such as an offset account or a redraw facility. These can provide valuable benefits, so it’s important to compare different loans and understand their available features.

The four types of personal loans

Many types of personal loans are available to Australian consumers, which can make finding the right one overwhelming and confusing. Before we jump into the different types out there, take the following into account:

  • The reason for your loan (e.g. purchase vs debt repayment)
  • Your predicted income security over the life of the loan
  • Your existing expenses (e.g. daily living expenses, bills, existing debts)

Keeping these in mind will help you make an informed decision on the right loan.

Secured personal loans

A secured personal loan is guaranteed or ‘secured’ by an asset you own, such as a car. What this means is that if you don’t make the agreed repayments, your lender could use that asset as collateral and take it to cover the cost of the loan.

The advantage of a secured personal loan is that because you’re securing your loan against an asset, you can expect lower interest rates than an unsecured loan. However, keep in mind that lenders will have strict conditions outlining what’s considered an asset, and you’ll have to provide documentation to prove its value.

Unsecured personal loans

An unsecured personal loan does not require any security for the money you borrow. While this is good for people who don’t have major assets, it can mean that you’ll pay a higher interest rate on the loan than if it was secured. Unsecured personal loans are more flexible and have faster approval than secured personal loans.

Fixed-rate loans

A fixed-rate loan retains the same interest rate throughout the term of your loan rather than fluctuating depending on the market. This is a good option for borrowers looking for the security of knowing exactly how much to budget for each month.

The predictable nature of a fixed-rate loan is a definite advantage for many borrowers, but it does come with downsides. Fixed-rate loans tend to come with higher fees, and you may need help to make extra payments on your loan to shorten its lifespan. If you wish to pay off your loan early, you may even be hit with a charge.

Variable-rate loans

Variable-rate personal loans can be a good option for people who can afford repayments if their interest rate goes up or down throughout the loan. While there’s the disadvantage of not knowing what you’ll have to budget for each month, there are advantages to variable rate loans, including you can make extra payments to reduce the length of your loan. You can often redraw from available funds.

Other types of personal loans

Co-sign loans

A co-sign loan requires someone not the principal borrower to add their name to the loan application as a guarantor. This means that the co-signer is legally responsible for the loan amount and any associated fees the borrower is unable to pay.

If someone asks you to co-sign their loan, you must think very carefully about whether this is the right choice for you. On top of repaying the loan amount, your credit score could be affected by their missed payments, and it’s tough to remove yourself from the agreement. You also have no right to the money that’s being lent even though you’re legally responsible for it.

If you have a low credit score, having someone co-sign your loan may improve your chances of approval or the interest rate that you’re offered.

Payday loans

A payday loan is a short-term loan designed to help borrowers make it to their next paycheque. While they’re easy to apply and be approved for, payday loans are known for their high-interest rates and significant fees and charges if you default on any of your payments.

In Australia, payday loans are heavily regulated due to a previous culture of predatory lending that left many people in significant debt. If you’re short on cash, it can be tempting to go with a short-term payday loan but be aware that the risk of falling into a debt spiral is very real. If you’re struggling financially, it’s best to speak to a Debt Solutions Company that can help get you back on track with a sustainable, long-term plan.

Credit card cash advances

A credit card cash advance is when you use your existing credit card to withdraw cash rather than pay for goods and services. This could include withdrawing from an ATM or point of sale, transferring money from your credit card to another account, using it for traveller’s cheques, or any other cash equivalents.

Usually, when you make a purchase on your credit card, it comes with an interest-free period, but with a cash advance, you’ll be charged a once-off fee which usually compounds daily. Missing a cash advance repayment can also negatively affect your credit score.

Debt consolidation loans

A debt consolidation loan is a way to roll all your debts into one single, manageable repayment amount. This means that instead of paying multiple interest rates for your different loans, if done well, your debt consolidation will be at one single interest rate that’s lower than the average of your current debts. Depending on your financial needs, a debt consolidation loan could help you with:

  • One affordable loan repayment
  • Potentially lower interest rates
  • A fixed payment term for your loan

This allows you to budget better each month and settle with any creditors chasing repayments. Debt consolidation may even help repair your score over time if you have poor credit due to missed payments.

Who is eligible for personal loans?

You’ll need to meet certain criteria to be eligible for a personal loan in Australia. Generally, lenders will require you to

  • Be over the age of 18 and a permanent resident of Australia
  • Have an Australian driver’s licence or other forms of photo identification
  • Meet the minimum income requirement
  • Have a good credit score and appropriate debt service ratio

If you’re a temporary resident and have a valid visa, many lenders will still consider you. But you have to meet the other criteria, such as confirmed employment in Australia and cash savings.

Lenders also take into account the length of your visa. Obviously, you can only take out a loan with a repayment term as long as the length of your visa.

How much can you get with a personal loan?

The amount of money you can get with a personal loan in Australia is mainly based on your credit score, income and employment status. Generally, lenders will offer amounts ranging between $2,000 to $60,000, depending on the lender’s requirements.

You’ll need to have a strong credit score and a steady job to get the higher amount. If your credit score is low, have it repaired first before you take out a loan. You may also be required to provide additional security, such as real estate or vehicle assets.

What are the risks of a personal loan?

When taking out any loan, weigh up the risks against the rewards and ensure you are only borrowing what you can afford to pay back. Personal loans come with risks such as:

  • The potential of being charged high-interest rates which can increase the total amount payable
  • Late payment fees can be imposed if you miss a repayment
  • Negative credit score if payments are not kept up to date
  • Misuse of funds and the potential for it to spiral out of control

It can also lead to stress. While personal loans usually have lower interest rates than credit cards, they can still be high compared to other types of credit. Unfortunately, too many Australians commit to personal loans they can’t afford, leading to financial stress and potentially significant consequences.

It’s important to remember that no matter how great a loan product may look upfront, many loan providers charge fees that can be hidden in your contract. And often, the longer your loan repayment period is, the more interest you’ll owe on top of the cost of the loan.

That’s why it’s so important to shop around to try and find the best possible deal on a personal loan, as it could potentially save you thousands of dollars in interest and fees.

Suppose you’re applying for a personal loan because you’re facing financial stress and need to consolidate your debts. In that case, it’s best to seek guidance from a Debt Solutions Company or a financial counselling service that can help you find a debt consolidation loan with a lower interest rate or an alternative solution with manageable repayments.

How to avoid the risks of a personal loan

When taking out any form of loan, consider your financial situation and ensure you are only borrowing what you can afford. Here are some handy tips:

  • Calculate how much you need before applying
  • Research different lenders and compare interest rates, fees and other charges
  • Ensure you can make the repayment amounts on time
  • Only take out as much money as needed
  • Be aware of any additional costs, such as processing or establishment fees
  • Always read the terms and conditions before signing up with a lender

How can a debt consolidator help?

Debt consolidators help people manage their debt by negotiating with creditors. This can include reducing interest rates, arranging payment plans and sometimes writing off the debt altogether.

They may also offer debt consolidation loans to help you combine multiple debts into a single loan. Additionally, they may help you reduce the amount you owe or restructure your debts, making them easier to manage.

If you find yourself in financial difficulty, consulting a debt consolidator could be beneficial for helping you get out of debt and regain control over your finances. They can provide tailored advice and assistance on how best to manage your situation and advise if a personal loan is the right option for you.


Personal loans are a great way to finance unexpected expenses, such as medical bills or large purchases. However, taking out any type of loan comes with risks, and it’s crucial to ensure you understand any potential risks before you sign up.

By researching and comparing lenders, you could find the right personal loan with an affordable repayment plan for your circumstances. With the correct information, taking out a personal loan can be a great way to get the money you need without putting yourself in financial danger.

Struggling with debt?

If you are already feeling overwhelmed by your debts or having trouble making your repayments, contact us or take our free debt assessment, and we’ll reach out to you. We can provide assistance and support, so there is no need to face it alone.


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