Key Points
- Interest rates and fees vary according to the lender, loan type and your circumstances.
- Your credit score tells the lender whether you can manage a loan responsibly.
- Lenders only care about your Australian credit history
A personal loan lets you borrow a sum of money, which you repay, with interest, over time.
We usually consider a personal loan for something specific like a car, a holiday, a wedding or debt consolidation.
“The real advantage of a personal loan is that it enables you to spread your costs over a set period of time, and that helps you budget and manage your money,” according to Andrew Dadswell from ASIC’s Moneysmart team.
“The disadvantage is that personal loans come with fees and obviously will charge you interest.”
The typical borrowing range is from $2,000 to $100,000, with repayment periods spanning from two to seven years.
Are you eligible for a personal loan?
To apply, you must be an Australian citizen or permanent resident aged 18 or older.
“There are some circumstances where, as a temporary visa holder, you would be able to get a personal loan, but there would be additional requirements,” Mr Dadswell says.
Lenders are only interested in your Australian credit history. They’ll ask for your employment details, proof of identity and what assets and debts you have, including credit cards.
They’ll also look at your ‘credit score’.
Credit report form on a desk with other paperwork. There are also a pen, glasses and a calculator on the desk Credit: courtneyk/Getty Images
What’s a credit score?
Think of this as a snapshot of your Australian credit history, Amy Bradney-George says, who is a personal finance expert at Finder.
“Your credit score is a number generally between 0 and 1000, and it gives lenders a benchmark for your ability to manage credit responsibly.”
A lower credit score means there's more risk for the lenders so they will increase that interest rate.Amy Bradney-George
Your credit score will drop if you've missed repayments on credit cards or loans in the past.
While it can be tempting to apply to several lenders at once, this can actually lower your credit score as it suggests you’re under financial stress.
Credit: Jacobs Stock Photography Ltd/Getty Images
What types of personal loans are out there?
Start by researching lenders, their interest rates, fees, requirements, and loan terms.
Financial institutions like banks and mutuals offer a range of personal loans with competitive interest rates.
“Banks and mutuals are bound by responsible lending regulations to ensure that the borrower can afford the loan,” Paul Farmer from lender Heritage and People's Choice, explains.
“Non-bank lenders offer personal loans and generally, their loan assessment requirements are more relaxed than the banks. However, expect to pay higher interest rates or fees on these loans.”
There are two main forms of personal loan you need to consider: secured and unsecured.
- Secured loans are used to purchase large assets such as cars. The lender uses your asset as security – or a guarantee – to minimise any risk to them if you cannot meet the loan commitments. If you don’t make your repayments, they can repossess your assets. Secured loans generally have fixed interest rates.
- Unsecured loans don’t require an asset as security, so the interest rates are generally higher.
“The lender will restrict the amount you can borrow,” Mr Farmer says. “Loan sizes are generally from $2,000 to $20,000.”
Applying for a loan
If you’re confident you can manage the repayments, you can usually apply to your preferred lender online and attach your documentation.
It’s not uncommon for an application to be rejected.
When assessing your application, the lender may determine that your income is insufficient to cover repayments, Ms Bradney-George warns.
“And tied to income, if you're in unstable employment, or you haven't been with your job for long, they can consider those factors against your application.”
You can always discuss financial hardship options with your lender if times get tough. Source: iStockphoto / Atstock Productions/Getty Images/iStockphoto
What if you can’t manage the repayments?
Late repayments usually attract additional fees.
If your financial circumstances change and you find yourself in a difficult situation, it’s important to discuss financial hardship options with your lender.
Be alert to scams
“If you're contacted about a personal loan, check the credentials of the company or the person you're dealing with,” Moneysmart’s Andrew Dadswell says.
“Don't agree to anything there and then. Always do your due diligence and if you're in doubt, ask for help.”
