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Looking to apply for a personal loan but want to know more about how they work? Whether you're looking to take out a personal loan to finance a new or used car purchase, consolidate debt, pay for a holiday or even cover wedding costs, there is a variety of options to choose from.
Use our guide to learn how personal loans work and help you choose the right one for your needs and situation.
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Personal loans work the same way as any other type of loan. You borrow a certain amount of money from a bank or lender to pay for the things you need. You then make an agreement with the lender to pay back your loan in monthly, fortnightly or weekly repayments.
Essentially, a personal loan helps you fill a short-term or long-term need for finance. You apply for a loan from a lender, who assesses your suitability for the loan, and if you are approved, the lender will send you the funds for the loan. Your repayments will include the principal loan amount (the amount that you borrowed), plus fees and interest. If you make your repayments as set out in your loan contract, your entire loan will be repaid by the time your loan term ends.
Jump ahead to one of the steps in the personal loan process to find out more about it.
Comparison Eligibility Application Approval Loan funding Repayment Loan closure
Finding the right personal loan is the first step of the process. There are a few parts to this, the first being choosing the type of personal loan that you want. Here is a breakdown of the main types of personal loans available:
After you've decided which type of personal loan you want to apply for, here's how to compare the personal loan offers from different banks and lenders:
Lenders have set eligibility criteria for their personal loans. These can include any of the following:
However, even if you meet the minimum requirements for a loan, you will not be approved unless you can prove that you can afford the repayments. Lenders determine this by looking at your income, your debts and the stability of your employment.
The application process for a personal loan differs between lenders. Generally, you will have the option of applying online, in-branch (if the lender has branches) or over the phone. You can find a list of the documents and information required to complete the personal loan application on Finder's individual lender review pages or on the lender's website. You may be asked to provide any of the following:
Online applications usually take about 15 minutes to complete.
Some lenders can give you an answer instantly while others may take a few days or weeks to approve you. There are two forms of approval: full approval and conditional approval.
Conditional approval usually takes less time but is given pending more information from you. This includes information such as additional payslips or documents relating to your assets or debts. Lenders may also ask for this information and not offer any conditional approval. This is to help them make a more informed lending decision.
Full approval is given when you have supplied sufficient information for the lender to make a decision and the lender has approved you for the loan.
Your loan can be funded in a number of ways, depending on the type of loan it is and what you're using it for. For example, when you take out a car loan, the lender may pay the car seller directly. This is also often the case with a debt consolidation loan, as lenders may opt to direct funds to your debtors, rather than to you.
If the loan is an unsecured personal loan, the funds will be sent to an account that you nominate. Some lenders can transfer funds on the same day you apply, while others might take a few days following approval.
Most lenders will allow you to choose your repayment structure – either weekly, fortnightly or monthly repayments. Generally, the more often you repay your loan, the less interest you will pay over the life of the loan. Therefore, when choosing your repayment structure, you may want to consider additional and early repayments.
If you are making your repayments as set out in your loan contract, then your loan should be closed following your final repayment. However, if you are planning to repay your loan early, it's a good idea to call the lender and get a final payout figure if you're getting close to paying off your loan. This is to ensure that the loan will be closed when you make your final payment and you won't be charged any unexpected interest.
No. If an application fee is charged for the personal loan you're applying for, it will be added to your loan amount once you're approved. It will then be paid off with your current repayments.
As with any financial product, there will be fees and charges payable by you to your lender. These may include approval fees, repayment fees, establishment fees and redraw fees, just to name a few. It's important that you read and understand your loan contract before applying. If there is any wording that you are unsure of, it's important that you ask your lender.
If you've paid extra funds into your loan account, you may be able to access these funds if your loan allows it. If it does not affect your repayments or your total outstanding balance, you could withdraw these funds.
This is simply a word to describe when the loan funds are actually made available to you by the lender.
When you take out a variable rate loan, the interest rate you are charged may change over the term of your loan. A fixed rate loan will have an interest rate that doesn't change.
This will be entirely dependant on your financial situation, goals and needs. If you want flexibility and the ability to make extra repayments and access extra funds, then a variable rate option is one to consider. If you want stability and the peace of mind of knowing that your repayments won't change over the life of your loan, then a fixed rate could be for you.
You will need to find out what date your loan repayments are due and work out a budget accordingly. You can usually make payments via BPAY, bank transfer or direct debit, depending on what your lender offers.
If you are struggling to make a repayment, you should immediately contact your bank or lender. They may defer the payment for a month or work with you on a solution. It's important to note that you may be charged extra interest on top of this.
You may be able to do this, but it's important to contact your lender to obtain a payout figure. You may incur break costs and other fees and charges.
Further Reading: Same-day personal loans
Picture: Shutterstock
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What information you do not give on a personal loan?
Hi Patty,
Thank you for getting in touch with finder.
Basically, we could tell you things that you should do to avoid your personal loan being rejected but NOT the info that you shouldn’t give because lenders or banks usually just ask for some important info about you related to your loan application and your financial capability to pay your loan.
You may check out this link for tips on what you need to do to get your personal loan application approved.
As a friendly reminder, while we do not represent any company we feature on our pages, we can offer you general advice. I suggest that you list questions you have about personal loan when you speak with the lender or bank that you have your application with since they can provide a more accurate info regarding your personal loan enquiry.
I hope this helps.
If you have any more questions, please feel free to contact us again.
Have a great day!
Cheers,
Jeni
Do you ever have to put security deposit down before you get money
Hi Daniel,
Thanks for your question.
There is generally no security deposit required for a personal loan. However, check with each lender before you apply.
Thanks,
Elizabeth