How do personal loans work?

Rates and fees last updated on

Find out how a personal loan works every step of the way.

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.

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.

The personal loan process

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

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 you want to opt for. Here is a breakdown of the main types of personal loans available:

This loans are specifically designed for the purchase of a vehicle. This vehicle is usually a new or used car but can also be a motorbike, motorhome, caravan or boat. The vehicle will be used as security for the loan, meaning if you default the lender can sell the vehicle to recoup its losses. In return, you can enjoy low interest rates, usually around 5-10% p.a. There will be restrictions on the age and condition of the vehicle so check this before you apply.

These loans are similar to car loans in that you will need to attach an asset, such as a vehicle, as collateral. However, you don't necessarily need to use the funds you borrow to purchase that asset. require you to offer an asset as collateral. This may be the case or you may already have the asset in your possession and be using the loan to consolidate debt or undertake home renovations. Secured loans are less risky for lenders so they offer lower rates.

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 lender can't claim any of your assets to recoup its losses) the interest rates are usually higher, but you will have more flexibility with how you use your loan amount. For example, you can purchase an asset as well as use it consolidate debt – however you use the loan is up to you.

Also referred to as cash advance loans or payday 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.

This is a type of credit that attaches onto your transaction account. You're able to access up to and including a specified limit when your available funds are exhausted and are charged a set rate. You are also usually charged a monthly or annual fee for the use of the credit line, but won't be charged interest unless you use the overdraft.

This is similar to an overdraft except it is an account separate to your transaction account. You will have a specific limit that you can draw up to and including and you're only charged for how much you use. As you repay, your credit limit becomes available again.

After you've decided what 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 lets you apply for and is it enough?
  • Loan terms. What are the minimum and maximum loan terms? 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?
  • Repayments. Once you know your loan amount and terms, you can use a loan repayment calculator to see if the repayments will be affordable on your budget.
  • Repayments. Can you choose between weekly, fortnightly or monthly repayments? Can you make extra repayments without a fee? Can you repay the loan early without penalty?

Step 2: Eligibility

Lenders have set minimum eligibility criteria for their personal loans. This can include any of the following:

  • Age. You will need to be 18 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. This may be $35,000 or lower, for example, $24,000. Find out more about borrowing on a low income here.
  • 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 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 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 and may include 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, bank statements and two years' of tax returns if you're self-employed. If you receive Centrelink 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 or conditional approval.

Conditional approval usually takes less time but is given pending more information from you, such as additional payslips or documents relating to your assets or debts. Lenders may just 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 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 are using it for. For example, when you take out a car loan the lender may pay the car seller directly. This is often the same case with a debt consolidation loan as well, with the lender directing funds to your debtors directly rather than to you.

If the loan is an unsecured personal loan the funds will be sent to an account 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. That is, weekly, fortnightly or monthly repayments. Generally, the more often you repay your loan the less interest you will pay. When choosing your repayment structure you may also want to consider additional and early repayments.

  • Find out if your lender will charge 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 you will have to pay

Step 7: Loan closure

If you are simply 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 the loan will be closed when you make your final payment and you won't be charged any unexpected interest.

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.

Compare a range of personal loans

Citi Personal Loan Plus

Citi Personal Loan Plus


9.99 % p.a.

variable rate


10.95 % p.a.

comparison rate

  • Loan amounts from $5,000
  • Offers a reusable credit facility
  • Repay over 5 years
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100% confidential application

Citi Personal Loan Plus

Apply for a Citi Personal Loan Plus and get competitive interest rate offer with a reusable credit facility.

  • Interest rate from: 9.99% p.a.
  • Comparison rate: 10.95% p.a.
  • Interest rate type: Variable
  • Application fee: $199
  • Minimum loan amount: $5,000
  • Maximum loan amount: $75,000
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Rates last updated October 17th, 2017
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Monthly Repayment Product Description
Citi Personal Loan Plus
From 9.99% (variable)
3 to 5 years
Borrow up to $75,000 to use for a range of purposes. Competitive rate of 9.99% p.a. available to all approved applicants.
RateSetter 2-Year Personal Loan
From 4.69% (variable)
2 years
$0 (Upfront fee $250 for loan terms of 2 years and above)
This peer-to-peer loan is only available for a 2-year term at the rate of 4.69% p.a.
RateSetter Personal Loan
From 8.66% (fixed)
0.5 to 5 years
$0 (Upfront fee $250 for loan terms of 2 years and above)
RateSetter offers personalised interest rates ranging from 3.7% p.a. to 9.6%.p.a. determined by your risk profile.
Pepper Money Unsecured Fixed Rate Personal Loan
From 9.99% (fixed)
1 to 7 years
Apply for up to $50,000 and receive conditional approval within minutes.
SocietyOne Unsecured Personal Loan
From 7.5% (fixed)
2 to 5 years
3% (of loan amount)
Based on your risk profile, you will receive a tailored rate between 7.5% and 20.14% with a SocietyOne personal loan.
Bank Australia Lifestyle Personal Loan
From 11.89% (variable)
1 to 10 years
A competitive variable rate loan that gives you ten years to repay.
Westpac Unsecured Personal Loan
From 12.99% (fixed)
1 to 7 years
$0 (On new loan applications before 7th December 2017)
Borrow up to $50,000 for a term of up to 7 years with the unsecured Loan from Westpac
DirectMoney Unsecured Personal Loan
From 8.5% (fixed)
3 to 5 years
This unsecured loan features tiers of interest rates from 8.5% p.a. to 19.95% p.a. based on your credit history.
NOW FINANCE Personal Loans
From 8.95% (fixed)
1.5 to 7 years
$395 (Based on $10,000)
Get rewarded with a low interest rate for your good credit history. Rates from 8.95% p.a. to 16.95% p.a. depending on your credit score.
RACQ Unsecured Personal Loan
From 12.95% (variable)
5 years
Apply for up to $30,000 to use for a variety of purposes end enjoy no penalty for early repayment. Note: You must be a QLD resident to apply.
St.George Unsecured Personal Loan - Fixed Rate
From 12.99% (fixed)
1 to 5 years
Convenient redraw facility, flexible personal loan repayment options with competitive interest rate.
Latitude Personal Loans (Unsecured)
From 13.99% (fixed)
2 to 7 years
$250 (Loans under $4000 - $140)
An unsecured loan designed for multiple purposes – renovating, buying a car or travelling. Funds can be in your account in as little as 24 hours.
Bank of Melbourne Unsecured Fixed Rate Personal Loan
From 12.99% (fixed)
1 to 5 years
Apply for a loan from $3,000 and lock in a competitive fixed rate for up to five years.
BankSA Unsecured Fixed Rate Personal Loan
From 14.06% (fixed)
1 to 5 years
Take advantage of a competitive fixed rate and no application fee for a limited time.

Compare up to 4 providers

Further Reading: Same day personal loans

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2 Responses

  1. Default Gravatar
    DanielFebruary 4, 2016

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

    • Staff
      ElizabethFebruary 4, 2016Staff

      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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