What Is A Personal Loan?

A personal loan is a type of unsecured loan that individuals can borrow from banks, credit unions, or online lenders. Personal loans are flexible financial tools for individuals needing to borrow money for various personal reasons, offering fixed repayment terms and typically unsecured lending. The terms and interest rates can vary significantly based on the lender and the borrower’s credit profile.

How Do Personal Loans Work?

Personal loans can be a flexible financial tool, but it’s important to understand the terms and ensure that the monthly payments fit within your budget.

Loan Amount and Term

  • Depend on the lender’s policies and your eligibility, which is often based on factors like your credit history and financial situation.

Interest Rates

  • Either fixed or variable interest rates.

Secured or Unsecured

  • A secured loan requires you to provide an asset as collateral, like a car or property, which the lender can claim if you fail to repay the loan.
  • Unsecured loans, while often having higher interest rates, do not require collateral, making them potentially more accessible but also riskier for the lender.

Repayment Structure

  • Involve making regular repayments, which include both the principal (the amount borrowed) and interest.

Extra Features

    • Ability to make extra repayments, which can help you pay off the loan faster and save on interest.
    • Redraw facilities may also be available, allowing you to access extra repayments you’ve made if needed.

The Benefits Of Personal Loan

Personal loans offer several advantages that make them a popular financial instrument for various needs. They are flexible and allow borrowers to use the funds for a wide range of purposes, from debt consolidation to major life events or unexpected expenses.

As most personal loans are unsecured, they don’t require collateral, which is an advantage for borrowers who don’t own or want to risk assets. They’re often offered with fixed interest rates and predictable repayment schedules, making budgeting and financial planning easier.

In addition, personal loans can be a useful option for building creditworthiness, as on-time payments have a positive impact on credit scores. For those with good credit ratings, personal loans can also offer lower interest rates compared to credit cards, making them a cost-effective option for major purchases or consolidating high-interest debt.

Reasons To Get A Personal Loan

  • Simplifying financial management
    • By consolidating multiple debts, such as credit card balances, into one loan with a potentially lower interest rate and a single monthly payment.
  • Personal loans can be utilised for various purposes such as
    • Financing home renovations or repairs.
    • Managing major life events like weddings or significant birthdays.
    • Covering unexpected medical bills or emergency expenses.
    • Facilitating large purchases.
    • Addressing education expenses not covered by student loans.
    • Funding business ideas.

Moreover, by responsibly repaying a personal loan on time, individuals can also improve their credit score, making debt consolidation an attractive option for refinancing high-interest loans or credit cards and diversifying their credit profile.

Eligibility Criteria

Credit Score
  • A higher credit score increases your chances of approval.
  • Can lead to better loan terms, such as lower interest rates.
Income and Employment Require proof of income to ensure that you have the means to repay the loan.
Debt-to-Income Ratio (DTI)
  • Measures your monthly debt payments against your income.
  • A lower DTI (generally below 40%) indicates a good balance between debt and income.
Age and Residency A minimum age requirement (often 18 or 21).
Bank Account Necessary for loan approval and the subsequent transfer of funds.
Credit History
  • Lenders will look at your past financial behaviour to assess risk.
  • A history of managing credit responsibly can be beneficial.
Collateral (for secured loans) Some loans require collateral, especially if your credit is not strong.

Ready To Apply For A Personal Loan?

Facing high interest rates can be intimidating, but with careful preparation, you can approach the process with confidence. Ensure you have a clear purpose for the funds, a stable income for repayments, a good credit score for favourable terms, and a solid understanding of your financial capacity to manage the additional debt responsibly.

Personal Loan Additional Information Disclosure

Minimum and Maximum period for repayment
  • The minimum repayment time period is ONE year.
  • The maximum reopyment time period is SEVEN years.
Annual Percentage Rate (APR): The annual percentage rate is 6.99 to 35.99%. This includes interest rates + fees + costs.
Maximum Annual Percentage Rate (APR):
  • Maximum Annual Percentage Rate (APR): The maximum annual percentage rate is 35.99%. This includes interest rates + fees + costs.
Real-life example of the total cost of a loan AUD Account Summary