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How do personal loans work?

Rates and Fees verified correct on March 23rd, 2017

Your guide to help you choose the right personal loan.

Looking to apply for a personal loan but want to know more? Find out how they work and how you can apply. Whatever you're looking to take out a personal loan for – to finance a new or used car purchase, consolidate debt pay for a holiday or even cover wedding costs – there are a variety of personal loans to choose from. Use the guide below to help you choose the right one for your needs and situation.

HSBC Personal Loan

HSBC Personal Loan Offer

Apply for a HSBC Personal Loan and get competitive interest rate offer with a flexible range of repayment options.

  • Interest Rate From: 9.50% p.a.
  • Comparison Rate: 10.06% p.a.
  • Interest Rate Type: Fixed
  • Application Fee: $150
  • Minimum Loan Term: 1 year
  • Maximum Loan Term: 5 year
  • Minimum Loan Amount: $5,000
  • Maximum Loan Amount: $50,000

Personal loan comparison

Rates last updated March 23rd, 2017
Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Application Fee Monthly Repayment
HSBC Personal Loan
A competitive fixed interest rate loan with the option to make extra repayments. Min. income $30,000
From 9.5% (fixed) 10.06% $5,000 1 to 5 years $150 Go to site More
Latitude Personal Loans (Unsecured)
An unsecured loan designed for multiple purposes – renovating, buying a car or travelling. Funds can be in your count in as little as 24 hours.
From 13.99% (fixed) 15.2% $3,000 2 to 7 years $250 (Loans under $4000 - $140) Go to site More
NOW FINANCE Personal Loans
Get rewarded with a low interest rate for your good credit history.
From 9.95% (fixed) 11.41% $4,000 1.5 to 7 years $395 (Based on $10,000) Go to site More
Citi Personal Loan Plus
Borrow up to $75,000 with this personal loan offer from Citi.
From 11.99% (variable) 12.77% $5,000 3 to 5 years $199 (monthly fees waived in the first year) Go to site More
ANZ Fixed Rate Personal Loan
A flexible loan option that lets you pay off your debt, buy a car, fix up your house or cover travel costs.
From 13.95% (fixed) 14.81% $5,000 1 to 7 years $150 Go to site More
MoneyPlace P2P Loan
Interest rates from 8.90% p.a to 17.25% p.a. Comp rates from 8.90% p.a to 19.01% p.a depending on your credit score.
From 8.9% (fixed) 8.9% $5,000 3 to 5 years 0% - 3.75% of loan amount Go to site More
Harmoney Peer-to-Peer Personal Loans
Borrow up to $35,000 with the unsecured peer to peer loan from Harmoney
From 8.99% (variable) 9.7% $5,000 3 to 5 years $500 (Upfront fee) Go to site More
SocietyOne Unsecured Personal Loan
Interest rates for a 3 year loan range from 7.88% p.a. to 25.49% p.a. Comparison rate from 9.9% p.a. to 26.74% p.a. depending on your credit score
From 7.88% (fixed) 9.9% $5,000 2 to 5 years 3% (of loan amount) Go to site More
St.George Get Set Loan Personal Loan
A revolving line of credit that lets you access your funds as and when you need to.
From 17% (variable) $5,000 $150 Go to site More
ANZ Variable Rate Personal Loan
A variable rate loan that lets you make and redraw additional repayments.
From 14.69% (variable) 15.55% $5,000 1 to 7 years $150 Go to site More

How do personal loans work?

Personal loans work in very much the same as any other type of loan. You borrow a certain amount of money from a bank or lender so that you can pay for the things you need to. You will have 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 then 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 plus fees and interest. If you make your repayments as set out in your loan contract, your entire loan will be repaid when your loan term ends.

how do personal loans work

How does a personal loan work

There are many different features of a personal loan, some of these include:

  • Interest rates. This is what you are being charged for the amount of money you borrow. The interest rate can be fixed or variable, with a fixed rate remaining the same for the entire loan term, and a variable rate being able to fluctuate in response to market conditions. It's important to compare rates to ensure you find one that is competitive.
  • Repayment flexibility. Lenders usually allow you to select weekly, fortnightly or monthly repayments via automatic direct debit. If the rate is variable you usually have more repayment flexibility, such as being able to make additional repayments or pay off the loan early without penalty. If you have a fixed rate you may be charged a fee for doing so.
  • Loan term. This refers to the life of the loan. A longer term generally means smaller repayment amounts, while a shorter term means larger repayments but you will pay back less overall.
  • Fees and charges. You must be aware of all possible charges associated with a personal loan. Some fees include monthly service fees, late repayment penalty fees, early repayment fees and application fees.

What happens when I apply for a personal loan?

The application process for a personal loan differs between lenders. Generally, you will have the option of applying online or in-branch (if the lender has branches) or over-the-phone. You can find a list of documents and information required to complete the personal loan application on review pages and on the lender's website. 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. Lenders may also come back to you and ask for more information, such as additional payslips or documents relating to your assets or debts. This is to help them make a more informed lending decision.

If you're approved for a loan funds usually become available to you in an online personal loan account, or if it's for a car loan the lender may pay the lender directly. If you aren't approved for a loan you are usually not able to find out why you were rejected.

How do I know if I'm eligible for a personal loan?

Lenders have set minimum eligibility criteria for their personal loans. This criteria may require you to earn a certain income, to have a certain type of employed (i.e. not self-employed or casual) or it can require you to be a permanent resident or Australian citizen. If you meet this minimum criteria, which is listed on each review page, you are able to apply for the loan, but it is no guarantee that you will be approved.

To get an idea of whether or not you will be approved, use a personal loan calculator to determine your loan repayments. Lenders will calculate your current expenses (rent, mortgage payments and living expenses) and then see if the loan repayments will be manageable on your current budget. There's no use reducing your current living expenses either, as lenders usually use a standard living cost to gauge your estimate's accuracy.

What to know about types of personal loans

There are a few different types of personal loans, with each one coming with a few features, benefits and of course, restrictions. Here is a breakdown of the main types of personal loans you'll have to choose from:

  • Secured loans. These loans require you to offer an asset as collateral. This asset is usually a car, but can be equity in a home, a motorbike, caravan, and these can be new or used, depending on the lender. In case you default on the loan payments, the asset (such as a car) will become the property of the lender to make up for their loss. Secured loans are less risky for lenders so they offer lower rates. However, the way you use the loan is usually restricted. For instance, if you're purchasing the asset with the loan amount, you're usually required to use the entire funds on that asset, or you can only borrow the exact cost of the asset, which will need to be assessed by the lender.
  • Unsecured loans. If you're looking to obtain funds without offering an asset as collateral, you can consider an unsecured loan. As there is a higher risk for lenders if you default, the interest rates are usually higher, but you will have more flexibility with how you use your loan amount. For instance, you can purchase an asset as well as use it consolidate debt – however you use the loan is up to you.
  • Payday loans. Also referred to as cash advance loans, these are smaller loans with shorter loan terms and a fast turnaround of funds (usually be available within 24 hours). They usually involve borrowing amounts of up to $2,000 paid back within 60 days. However, due to their extremely high interest fees (charged as a percentage of the principal), these loans should only be considered when you have no alternatives).
  • Overdraft/ Line of credit loans. If you’re unsure as to how much money you need, you may want to consider an overdraft. Your lender will allow you to overdraw up to a certain amount on your bank account. You will only pay interest if you decide to overdraw, giving you great flexibility to only use the loan when you absolutely need to.

How you can find the right loan for you

Still not sure which personal loan you should choose? The first step is deciding what you need. Ask yourself the following questions to help you narrow down your needs:

  • Why do I need a personal loan? You might need to purchase a car, use the funds for some home repairs or even to pay for some wedding expenses. If you need a large amount of money over a long period, you may need to consider a secured loan. Otherwise, if it’s for an emergency, you might want to consider a payday loan, personal overdraft or same-day personal loan from your current bank.
  • How much do I need to borrow? Working out how much you need is extremely important – you don’t want to borrow more or less than necessary. If you borrow more than you need, you will be paying more interest than you have to. On the other hand, if it is less than you need you may have to take out a second loan and pay double the interest. Sometimes, a credit card could be a more viable option.
  • What repayments can I afford to make? In order to determine how much you can afford to make in repayments, you will need to draw up a monthly budget. List all of your expenses (bills, other loan payments, groceries, etc) and deduct this from your monthly income. The amount leftover will give you an indication of how much you can make in repayments. However, don’t dedicate all of your expendable income to your loan repayments, as you need to leave some for emergencies and unexpected expenses.
  • How soon do I need the funds? This will also be a determining factor as to the loan that's right for you. Turnaround times will differ from lender to lender. If you have an unexpected car service or trip to the dentist, you may need funds in your account the next day. For example, Commonwealth Bank and Westpac Bank offer same-day access to funds for existing customers. Otherwise, you will need to consider payday loans. If you’re looking to buy a car within the next month, a secured or unsecured loan will suffice.

Questions we've been asked 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 with 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 you read and understand your loan contract before applying. If there is any wording 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 you 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 your bank.

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 any extra funds, then a variable rate option is one to consider. If you want stability and the peace of mind knowing your repayments won't change over the life of the 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 deposit 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 a payment for a month or work with you on a solution. It's important to note 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 is 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

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Related Posts

HSBC Personal Loan

A competitive fixed interest rate loan with the option to make extra repayments. Min. income $30,000

ANZ Variable Rate Personal Loan

A variable rate loan that lets you make and redraw additional repayments.

Latitude Personal Loan (Secured)

Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.

NOW FINANCE Personal Loans

Get rewarded with a low interest rate for your good credit history.

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2 Responses to How do personal loans work?

  1. Default Gravatar
    Daniel | February 4, 2016

    Do you ever have to put security deposit down before you get money

    • Staff
      Elizabeth | February 4, 2016

      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.



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