How do personal loans work?

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.

Alex Personal Loan

Alex Personal Loan

From

5.49 % p.a.

fixed rate

From

5.49 % p.a.

comparison rate

• Low interest rate from 5.49% p.a.
• No manual paperwork
• Use for various purposes

100% confidential application

Alex Personal Loan

Alex offers personal loan with a variable interest rate from 5.49% p.a. No manual paperwork needed.

• Interest rate: 5.49% p.a.
• Comparison rate: 5.49% p.a.
• Interest rate type: Fixed
• Application fee: $0 (Waived $295 establishment fee)
• Minimum loan amount: $2,100
• Maximum loan amount: $30,000

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Name	Product	Interest Rate (p.a.)	Comparison Rate (p.a.)	Min Loan Amount	Loan Term	Application Fee	Monthly Service Fee	Monthly Repayment
Alex Personal Loan		From 5.49% (fixed)	5.49%	$2,100	6 months to 5 years	$0 (Waived $295 establishment fee)	$0		Go to site More Info	You'll receive a fixed interest rate from 5.49% p.a. to 19.99% p.a. based on your risk profile Borrow between $2,100 and $30,000 from 6 months to 5 years. Note: The $295 establishment fee will be waived for loan applications submitted by 3 May 2021	Compare	loading Fetching your data...
Harmoney Unsecured Personal Loan		From 6.99% (fixed)	7.79%	$2,000	3 to 5 years	$575 ($275 for loans of below $5,000)	$0		Go to site More Info	You'll receive a fixed rate between 6.99% p.a. and 24.79% 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.	Compare	loading Fetching your data...
Plenti Personal Loan		From 6.39% (fixed)	6.39%	$2,001	3 to 7 years	$0 to $999	$0		Go to site More Info	You'll receive a fixed rate between 6.39% p.a. and 17.89% p.a. based on your risk profile A flexible loan with amounts from $2,001 and terms starting from 3 years. Interest and comparison rates calculated for a loan term of 5 years.	Compare	loading Fetching your data...
Symple Loans Personal Loan		From 5.75% (variable)	6.47%	$5,000	1 to 7 years	from 0% to 5% of the loan amount	$10		Go to site More Info	You'll receive a personalised interest rate from 5.75% p.a. to 25.99% p.a. based on your risk profile Borrow up to $50,000 to pay for what you need.	Compare	loading Fetching your data...
NAB Personal Loan Unsecured Fixed		From 6.99% (fixed)	7.91%	$5,000	1 to 7 years	$150	$10		Go to site More Info	You'll receive a fixed rate between 6.99% p.a. and 18.99% p.a. ( 7.91% 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.	Compare	loading Fetching your data...
Citi Personal Loan Plus		8.90% (variable)	9.18%	$5,000	3 to 5 years	$199	$0		Go to site More Info	You'll receive a variable rate of 8.90% p.a. with a comparison rate of 9.18% p.a. A credit limit up to $40,000 that you can continue to draw down over terms up to 5 years. Note: Monthly account service fee will be waived for applications submitted before 30 September 2021.	Compare	loading Fetching your data...
OurMoneyMarket Personal Loan		From 5.35% (fixed)	6.31%	$2,001	1 to 7 years	1.5–6% of your total loan amount	$0		Go to site More Info	You'll receive a fixed rate from 5.35% p.a. to 20.99% p.a. based on your risk profile A personalised loan from $2,001 to $75,000 that varies based on your credit history and financial situation. ⭐ Finder Exclusive: Apply before April 30th to secure a discounted rate of 5.35% p.a. (comparison rate: 6.31% p.a.) for the first 12 months.	Compare	loading Fetching your data...
NOW Finance No Fee Unsecured Personal Loan		From 5.95% (fixed)	5.95%	$5,000	18 months to 7 years	No Establishment Fee	$0		Go to site More Info	You'll receive a fixed rate between 5.95% p.a. and 17.95% p.a. based on your risk profile Borrow from $5,000 to $7,999 with loan terms between 18 months and 3 years or borrow $8,000 to $50,000 with loan terms between 18 months and 7 years. ⭐ Finder Exclusive: Get a free $200 Westfield e-gift card once your loan application has settled. Offer ends on 30 April 2021. T&Cs apply.	Compare	loading Fetching your data...
Latitude Personal Loan (Unsecured)		From 7.99% (fixed)	9.24%	$3,000	1 to 7 years	$250 (Loans under $5000 - $140)	$13		Go to site More Info	You'll receive a fixed rate between 7.99% p.a. and 22.99% p.a. based on your risk profile Apply for what you need from $3,000 and use it for a range of purposes. Repay weekly, fortnightly or monthly. You can check your interest rate before applying with no impact to your credit score.	Compare	loading Fetching your data...
SocietyOne Unsecured Personal Loan (2-3 years)		From 6.39% (fixed)	6.39%	$5,000	2 to 3 years	from 0% to 5% of the loan amount	$0		Go to site More Info	You'll receive a fixed rate between 6.39% p.a. and 17.49% 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.	Compare	loading Fetching your data...
SocietyOne Unsecured Personal Loan (5 years)		From 6.39% (fixed)	6.39%	$5,000	5 years	from 0% to 5% of the loan amount	$0		Go to site More Info	You'll receive a fixed rate between 6.39% p.a. and 19.99% 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.	Compare	loading Fetching your data...
Wisr Personal Loan		From 6.49% (fixed)	6.76%	$5,000	3 to 5 years	$595	$0		Go to site More Info	You'll receive a fixed rate between 6.49% p.a. and 19.95% p.a. based on your risk profile A loan from $5,000 that charges no fees for extra or early repayments. Keep in mind security is required in some cases.	Compare	loading Fetching your data...
MoneyMe Personal Loans		From 6.25% (fixed)	7.64%	$2,100	1 to 5 years	from $295 to $495	$10		Go to site More Info	You'll receive an interest rate between 6.25% p.a. and 19.95% p.a. based on your risk profile Borrow up to $50,000 with no hidden fees or costs. Application process usually takes 5 minutes to complete and is done fully online.	Compare	loading Fetching your data...
CUA Unsecured Fixed Rate Personal Loan		9.39% (fixed)	9.64%	$5,000	1 to 7 years	$175	$0		Go to site More Info	You'll receive a fixed rate of 9.39% p.a. An unsecured loan from $5,000 with flexible repayments and no monthly fee.	Compare	loading Fetching your data...
Pepper Money No Fee Personal Loan		From 5.95% (fixed)	5.95%	$5,000	18 months to 7 years	$0	$0		Go to site More Info	You'll receive a fixed rate between 5.95% p.a. and 17.95% p.a. based on your risk profile Borrow from $5,000 to $50,000 and use for a range of purposes. Pay no upfront, early repayment or ongoing fees.	Compare	loading Fetching your data...

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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.

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 that you want. Here is a breakdown of the main types of personal loans available:

• Car loans

  These 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. This means that if you default on the loan (you cannot pay back the amount that you borrowed), 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 usually be restrictions on the age and condition of the vehicle, so check this before you apply.

• Secured personal loans

  These loans are similar to car loans in that you will need to attach an asset, such as a vehicle or home equity, as security. However, you don't necessarily need to use the funds you borrow to purchase that asset (or any asset in particular). You may already own the asset and be using the loan to consolidate debt or undertake home renovations. Secured loans are less risky for lenders so they offer lower rates. Alternatively, if you have bad credit, offering asset security may help you to be approved for a personal loan.

• Unsecured personal 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 lender can't claim any of your assets to recoup losses) the interest rates are usually higher. However, you will have more flexibility as to how you use the loan. For example, you can purchase an asset with the loan and use the remaining funds to consolidate debt. Whatever way you want to use the loan is up to you.

• Short term loans

  Also referred to as cash advance loans or payday loans, these are smaller loans with shorter loan terms and a fast turnaround on funds (the funds are usually available within 24 hours). They usually involve borrowing up to $2,000, which is paid back within 60 days. However, due to their extremely high interest rates (charged as a percentage of the principal), these loans should only be considered when you have no other alternatives.

• Personal overdraft

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

• Personal line of credit

  This is similar to an overdraft except that it is 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 the credit, your credit limit becomes available again.

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

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