What is a personal loan? Types of personal loans

If you’re considering taking out a personal loan, it’s important to understand the different options available to you so you can make the best possible decision for you and your circumstances. Not all loans are created equal and without the right knowledge, it’s easy to commit to something that is unmanageable—leading to missed repayments and significant financial consequences.

Wondering what a personal loan is and whether taking one out is right for you? This handy guide will help you understand everything you need to know about personal loans and the different types you can apply for.


What is a personal loan?

A personal loan is a form of credit provided by financial institutions such as banks, credit unions, or special loan providers. It allows you to borrow money to make big purchases such as home renovations, a car, or to consolidate existing debts. If you take out a personal loan you have to repay the money with interest over a fixed term—usually somewhere between one to seven years.

How some personal loans can lead to financial 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 that often the longer your loan repayment period, 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.

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


Types of personal loans

There are many types of personal loans available to Australian consumers, which can make finding the right one overwhelming and confusing. Before we jump into the different types out there, it’s important to 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 for you.


Secured personal loan

A secured personal loan is one that is guaranteed or ‘secured’ by an asset you already 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 loan

An unsecured personal loan is one that doesn’t 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 a faster approval process than a secured personal loan.

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 not be able 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 with the flexibility to afford repayments if their interest rate goes up or down over the course of 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, and you can often redraw from available funds.

Co-sign loans

A co-sign loan requires someone who is 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 very difficult 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 pay cheque. While they’re easy to apply and be approved for, payday loans are known for their high interest rates as well as 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 who can help get you back on track with a sustainable, long term plan.

Credit card cash advance

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, or using it for travellers 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 loan

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 as well as settle with any creditors who are chasing repayments. If you have poor credit due to missed payments, debt consolidation may even help repair your score over time. 


How can I apply for debt consolidation?

If you’re ready to get back on your feet and enjoy the freedom that comes with having your finances under control, speak to the friendly team at Debt Negotiators. We’ve helped thousands of Aussies who are struggling to pay off multiple debts with different repayment dates and interest rates. We listen to you and truly get to understand your needs so that we can personally tailor your next steps.

Why not try our no-obligation free debt assessment to see where you’re at and what your next steps should be or contact the team for more information.


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