The ultimate guide to personal loans

All you need to know about personal loans: How they work, and how to go about getting one.

18 Jun 2021 | Personal finance | Share:

Personal loans help Aussies from all walks of life to afford necessities, projects, and dreams that would otherwise be financially out of reach. Most of us take out loans for our home, car, or business. But what about other expenses that pop up in life? What about weddings, new babies, or home renovations? You may also have opportunities for travel or self-improvement, unforeseen increases in living expenses, debt, or a need to help a loved one.

There are all kinds of reasons people find themselves needing extra cash flow. A personal loan can help borrowers bridge the gap. And fortunately, modern lenders make it faster and easier than ever to get a personal loan that fits your specific needs and financial situation.

How much can I borrow with a personal loan?

How much you can borrow with a personal loan depends on several factors. As with any type of loan, your lender will want to see evidence of your ability to repay. You’ll be able to borrow more if you have a solid credit history and stable income. But even if you don’t, certain lenders may still be able to approve you for a personal loan.

If you are a borrower with a low credit score or new job, you will likely pay a higher interest rate or have a lower maximum loan amount. In any case, the amount you can borrow with a personal loan will depend on your overall financial situation as well as the loan term.

What is a small personal loan?

A small personal loan is usually considered less than $2,000. Named payday loans, these types of loans generally attract higher interest rates, with a short timeframe to be repaid. In contrast, people take out larger personal loans for significant sums they don’t have time to save for. Most major lenders have personal loan minimums of about $5,000.

What is an unsecured personal loan?

An unsecured personal loan is a loan that is not asset-backed. The loan is approved solely on the lender’s review of the borrower’s ability to repay. With an unsecured personal loan, the lender has no assets to sell to recoup losses if the borrower defaults. Because the risk to the lender is higher, interest rates on unsecured personal loans tend to be higher than for secured loans. However, for those with good credit, the rates may still be very competitive.

Borrowers with recent history of bad credit, high existing debt, or unusual income sources may have more limited options when it comes to accessing an unsecured personal loan. It may still be possible, but the interest rate will be higher than it would be for a secured loan. Unsecured personal loans are generally best for borrowers who don’t own any significant assets, but who have a strong credit history and solid financial positioning.

What is a secured personal loan?

A secured personal loan is a loan that is taken out against an asset that serves as collateral. With a secured personal loan, the lender can recoup their losses if the borrower defaults by selling the asset used as security for the loan. Secured personal loans are mostly used to buy new or used motor vehicles Interest rates for secured personal loans tend to be lower than for unsecured personal loans, because there is less lender risk. Unlike an unsecured loan, the lender has recourse to the underlying asset if the borrower becomes unable to service the loan.

What is the interest rate on a personal loan?

Interest rates for personal loans will fluctuate with market conditions. But the specific interest rate offered when you take out a personal loan generally remains the same throughout the life of the loan. Plus, with fixed repayments, you can budget more easily. It’s important to note that some lenders take a one-rate-fits-all approach to their personal loan offering. This means that even if you have an exceptionally strong credit profile, your interest rate will be the same as everyone else. It may also mean that if your financial situation isn’t ideal, the lender may decline your loan application if it doesn’t cater their narrow risk profile.

Getting declined by one lender can then hurt your chances of getting approved elsewhere. So it’s really important to do your homework and find a lender who is likely to approve you the first time around. Using a lender that offers personalised interest rates catered to your own credit profile can help reduce this risk. Some lenders provide quick and easy interest rate estimate tools online that don’t impact your credit file. This allows you to find out what your likely interest rate would be, before formally applying.

Can I get a personal loan if I have bad credit?

Yes, some lenders will approve you for a personal loan even if you have a bad credit history. Traditional lenders are more likely to deny applications for personal loans unless the borrower has a certain minimum credit score. But these days, more and more specialty lenders have the resources and flexibility to look more closely at an applicant’s total financial picture. The reality is that many people’s credit scores don’t reflect their current ability to repay a new loan. An applicant may have experienced a job loss or financial hardship in the past but have since regained their financial footing.

Borrowers with bad credit may be subject to higher interest rates on personal loans, but the rate is still potentially lower than the one charged on credit cards or past due accounts. For this reason, borrowers seeking to merge multiple credit card debt sometimes take out a personal loan. It can cut down on total monthly expenditure, and simplify everything into one easy payment. Lenders typically look more favourably on borrowers with only one loan account than those with many different ones through different creditors. Consolidating debt with a personal loan can make it easier to get a home, business, or car loan in the future.

How long does it take to get a personal loan?

How long it takes to get a personal loan depends on your lender’s policies, turnaround time and technology offering. More Aussies are obtaining personal loans through online lending outlets. Applicants no longer need to gather all their financial documents, attend the bank in person, sit down with a representative and explain why they need the money and how they will pay it back.

With the advent of secure online portals, many modern lenders can access your bank statements and payslips online, expediting the application and approval process. It is not unrealistic to expect an indicative preapproval in as little as two minutes. With improvements to our national payment arrangements, it’s now possible to fund some personal loans in as little as an hour.

Different lenders have different timelines, so it makes sense to ask before you apply. Note that self-employed borrowers may take a bit longer to get approved for a personal loan because their income stream may not be as regular and as quick to verify. Contractors, small business owners, and freelancers may need to supply tax returns or alternative income proof. But for all borrowers, getting a personal loan doesn’t take nearly as long as it used to, and the application process can be much more streamlined depending on the lender you use.

Will applying for a personal loan affect my credit score?

Getting an online interest rate quote for a personal loan won’t affect your credit score. This is usually a very quick process and only takes a couple of minutes. However, once you are ready to proceed and submit a formal application, it’s at that point the lender will conduct a formal credit enquiry. This will leave a note on your credit file and also feed into your credit score. For this reason, it is important to do your research before formally applying for a personal loan. Too many applications for credit in a short time frame can significantly impact your credit score and your likelihood of approval for a new loan.

How do I apply for a personal loan?

Before you apply for a personal loan, do your research. Instead of just going to the same bank you’ve always used, take advantage of the various financial comparison websites that compare different lenders and products. From here you can then check out several lender websites and see if they offer personalised interest rates online. You can get an indication of your potential interest rate in under two minutes, without affecting your credit score.

Before you proceed with a formal application, gather your relevant income documents and financial information. You may need them for reference, but you may not even need to submit them. Many online personal loan lenders can confirm your income by accessing your bank account statements directly, through secure online portals. This spares you the hassle of scanning or emailing a bunch of documents or going into a branch to apply in person. A broker or financial adviser can also help you with your application and can communicate with the lender on your behalf.

Have more questions?

Get in contact today and discover how a personal loan can help you get financial.