How do personal loans work?
Find out how personal loans work at every step of the way and compare different loans now.
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.
- Get a personalised comparison rate based on your credit score
100% confidential application
Plenti Fixed Rate Personal Loan
Plenti offers this unsecured personal loan with a fixed or variable rate. Receive a tailored interest rate from 6.49% p.a. based on your risk profile.
- Interest rate from: 6.49% p.a.
- Comparison rate: 6.84% p.a.
- Interest rate type: Fixed
- Application fee: From $149 to $599
- Minimum loan amount: $2,001
- Maximum loan amount: $45,000
Compare a range of personal loans
How do personal loans work?
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.
The personal loan process
Jump ahead to one of the steps in the personal loan process to find out more about it.
Step 1: Comparison
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:
- Loan amount. What is the minimum and maximum amount the lender will let you apply for and is it enough?
- Loan term. What is the minimum and maximum loan term? Usually, terms of between one and seven years are available, but terms differ between providers.
- Fees. Check for upfront fees such as establishment or application fees, and ongoing fees such as monthly or annual fees. These will need to be incorporated into your loan amount.
- Interest rate. Is the rate fixed or variable? Is the rate competitive?
- Affordability. Once you know your loan amount and term, you can use a loan repayment calculator to see if your regular repayments will be affordable on your budget.
- Repayments. Can you choose between weekly, fortnightly or monthly repayments? Is it possible to make extra repayments without penalty? Can you repay the loan early without penalty?
Step 2: Eligibility
Lenders have set eligibility criteria for their personal loans. These can include any of the following:
- Age. You will need to be at least 18 years old to apply for a loan for Australia. Some lenders may require you to be over 21.
- Income. You may need to earn over a certain amount to be eligible to apply for a loan. Some lenders may require you that earn as much as $35,000. Other lenders may require lower earnings, such as $24,000. If you're unsure whether your income is high enough, there are loans specifically designed for people on lower incomes.
- Employment. Most lenders will require you to be employed, but some will consider unemployed applicants. Some lenders will also require you to be out of your probation period or to be employed full-time. You can find lenders that consider casual employees here. Some lenders may also consider applicants receiving Centrelink payments.
- Residency. You may have to be an Australian citizen or permanent resident to be eligible for a personal loan, although some lenders consider temporary residents.
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.
Step 3: Application
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:
- ID. You will need to provide your driver's licence, passport or a form of photo ID.
- Proof of income. Depending on the lender, you'll need three to six months of payslips and bank statements, and two years of tax returns if you're self-employed. If you receive Centrelink payments, you will need receipts to show your income.
- Other financial documents. If you have other debts, such as loans or credit cards, you will need statements from those accounts.
Online applications usually take about 15 minutes to complete.
Step 4: Approval
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.
Step 5: Loan funding
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.
Step 6: Repayment
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.
- Find out if your lender will charge you fees for additional repayments
- Check if your lender has restrictions on how much you can repay extra per year (generally fixed rate personal loans have this)
- If you're planning to repay your loan early, check if there is a penalty for doing so
Step 7: Loan closure
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.
Questions about how personal loans work
Do I have to pay the application fee before I apply for the loan?
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.
Are there any hidden fees or charges?
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.
Can you explain what a redraw is?
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.
What about a drawdown?
This is simply a word to describe when the loan funds are actually made available to you by the lender.
What is the difference between variable and fixed rate loans?
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.
Which is better, a fixed or variable rate?
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.
How do I make my loan repayments on time?
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.
I can't make my repayments this pay period. What can I do?
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.
I want to pay out my loan in full. Can I do 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
Personal Loan OffersImportant Information*
You'll receive a fixed rate between 6.99% p.a. and 25.69% p.a. based on your risk profile.
Apply for a loan up to $50,000 and repay your loan over 3 or 5 years terms.
You'll receive a fixed rate between 9.99% p.a. and 18.99% p.a. ( 10.88% p.a. to 19.83% p.a. comparison rate) based on your risk profile
An unsecured loan up to $55,000 you can use for a range of purposes and pay off over up to 7 years. Note: Majority of customers will get the headline rate of 12.69% p.a. (13.56% p.a. comparison rate) or less. See Comparison rate warning in (i) above.
You'll receive a fixed rate between 6.99% p.a. and 20.49% p.a. based on your risk profile
A loan from $5,000 to use for a range of purposes. Benefit from no ongoing fees and no early repayment fee.
You'll receive a fixed rate between 6.95% p.a. and 17.95% p.a. based on your risk profile
A loan from $5,000 to use for a range of purposes. Make additional repayments or pay off the loan early, penalty-free.
Ask an Expert