Think you deserve a better rate? These are the banks that may be willing to give it to you.
Ten years ago, risk-based pricing was unheard of in Australia. Now you'll find a number of household-name lenders offering you a personalised ("risk-based") rate. Risk-based pricing refers to rates that are determined by the risk you pose to the lender. This is usually based on your credit history, your financial situation, the loan amount you requested or the loan terms.
Find out which lenders offer risk-based pricing for their personal loans, how the rates are determined and whether these loans are a good option for you.
What is risk-based pricing?
Risk-based pricing is when banks and lenders offer products that have no set price, usually for the product's interest rate. Instead, they have a minimum and maximum range for what the product can cost, and they'll offer you a price within that range.
If the lender decides that you are low risk and that you are likely to repay the loan on time, you will get a lower rate. If you are a higher risk, which may be because you have more debt or a lower income, the lender may give you a higher interest rate.
Why haven't banks always offered risk-based products?
While risk-based pricing is the standard in other countries such as the US, it has not traditionally been available in Australia. There are a few reasons for this, but the main reason is because Australian credit reports used to only show negative information. This made it difficult for banks to get a well-rounded impression of potential borrowers and apply a risk-based rate to a customer's product.
Now, with the introduction of comprehensive credit reporting, banks and lenders will be better able to see whether a borrower is a risk and therefore better able to accurately price their products.
Risk-based personal loans you can apply for
How do lenders determine your personalised interest rate for a personal loan?
Banks and lenders that offer risk-based pricing determine your interest rate in a number of ways. They may consider the following:
- The loan amount that you request. A lower loan amount is a lower risk for the bank than a higher amount. This is because if you fail to repay the loan they will lose less money.
- How long you need to pay the loan back. Your loan term can be a telling factor in how much of a risk you'll be, because it shows how much you can afford to pay. If you need seven years to pay off a $10,000 loan then you are a higher risk than someone who can afford to pay off the same loan in one year. Make sure you work out your ongoing loan payments and choose the shortest loan term that you can comfortably afford.
- Your credit score and credit history. Comprehensive credit reporting means that more information (including two years of your repayment history) is now available to view on your credit report and that more factors will affect your credit score. Banks and lenders can now use your credit report and score to get a better idea of your full history as a borrower, both positive and negative.
- Your financial history. Your income, employment situation, address, age and other factors are also used to determine your risk. For example, a 21-year-old who has been employed casually for six months is more of a risk than a 30-year-old who has been employed full-time at the same job for five years. This is not only because they have a more stable employment situation, but also because it's likely that the 30-year-old has a fuller financial history that the lender can use to make a decision.
How do you compare personal loans with tailored interest rates?
Comparing risk-based personal loans can be tricky because you don't know what interest rate you're going to get. However, there are still a number of features you can look at:
- Fees. While the interest rates are risk-based, the fees may not be. Check what upfront and ongoing fees may apply and see if these change depending on the interest rate you receive.
- Loan amount. How much are you able to borrow? Some loans have a more generous maximum loan amount and some come with a higher minimum that may not suit your needs.
- Repayment flexibility. Are you able to repay the loan early without penalty or make additional payments without any extra fees? Check how flexible the repayments are.
- Is security required? You may find that the interest rate range is more competitive but that you need to provide security.
- Interest rate range. While all risk-based lenders provide an interest rate range (the minimum and maximum rate that can be charged to approved borrowers), these ranges will differ. You may find that some lenders offer a lower minimum rate or a higher maximum rate.
- How risk is calculated. Lenders may only use the loan term and loan amount to determine your risk, while others may use the loan term and loan amount as well as your credit score. Check this before you apply.
How does the application process work for a risk-based personal loan?
This differs between lenders, but generally, you can expect the following process:
- Complete the rate estimate. This is a shorter application that requires fewer details than a full loan application. These details include your personal information, how much you want to borrow and what your credit score is like (good, great, low, etc). This does not affect your credit score.
- Review your rate estimate. After you complete this form you will receive an estimate of the interest rate you're likely to receive if you submit a full application. Keep in mind that this rate may change depending on the details that you provide in your final application.
- Complete your full application. If you are happy with your rate estimate, you can complete a full loan application. This is a credit enquiry and will be listed on your credit report.
- Accept your loan. If you are approved for the loan and are happy with your interest rate, you can accept your loan offer.
Questions we've been asked about risk-based pricing
Can you find out your interest rate before you apply?
Most lenders will provide you with a rate estimate before you submit a full application. This does not affect your credit score.
Are risk-based personal loans better than standard personal loans?
Neither product is better than the other, but one may suit your needs better. For example, if you feel that you would be a low-risk borrower that could qualify for a lower rate, you may want to apply with a risk-based lender.
How can I tell if a lender offers a risk-based product?
We will note it in our comparison tables by showing an interest rate range rather than a single interest rate.