Seizing the moment: a guide to personal loans
You've done it. You've made the decision. You're going to book that holiday you've been planning since before the pandemic, finally fix up the kitchen, or book the car in at the mechanic (that clunking noise is still there).
The good news is, you can make it happen even if you don't have the cash right now.
So how much can you borrow? And how do you know which personal loan is right for you?
Here are a few things to consider before you seize the moment.
How much can you borrow?
The amount you can borrow is generally based on your income, as well as other factors such as existing financial commitments (such as other loans and credit cards) and your credit history (your past loan and repayment history). Your financial provider will ultimately decide how much you can borrow.
What options do you need to consider?
Comparison rates can be useful for comparing the overall cost of different loans. It takes into account upfront and ongoing costs such as establishment and monthly account-keeping fees. It represents this as a single percentage figure based on a defined loan term and loan amount.
While they're a useful tool, there are a few things you need to keep in mind about comparison rates. There isn't a standardised loan term among Australia's financial institutions, so when looking at comparison rates on different products you should make sure they're for the same time period.
And some loans offer additional benefits (like the ability to make extra repayments) that aren't included in comparison rate calculations.
Fees and charges
Before you sign on the dotted line, it's a good idea to look at any fees and charges that may be applicable.
Some personal loans come with loan application and monthly account-keeping fees. And so, while some loans may have a lower interest rate, they may end up costing you more due to higher fees. The comparison rate can help you to compare total loan costs.
You may also want to consider whether there are any penalties for making extra repayments or for paying off the loan earlier than the agreed term. The more payments you can make, the quicker you can pay off your loan.
Secured versus unsecured
You can also choose between a secured or unsecured personal loan.
A secured loan is 'secured' against the asset you are borrowing for such as a car. Most secured personal loans have a lower interest rate when compared to an unsecured personal loan because there is an asset attached. If you are unable to repay the loan, the lender can sell the asset to cover the costs of the loan.
An unsecured personal loan is a loan that does not require an asset as security. Your income and ability to repay the loan is still assessed but you don't need an asset to secure the loan.
The loan term is the set period of time to repay your personal loan.
A longer loan term will reduce your monthly repayments but will increase the amount of interest you pay over the life of the loan compared to a shorter loan term.
When comparing loan options, make sure that the term of the loan is the same for each loan you are comparing (for example, compare a two-year loan with other two-year loans).
Applying for a personalised interest rate
A personalised interest rate is based in part on an assessment of your credit score. For this reason, it’s a good idea to check yours before you apply.
Credit scores are calculated by looking at various aspects of your credit history and profile. These can include details of any applications you’ve made for credit or a loan (whether successful or not), details of credit or loan products you have held in the past, your repayment history, any overdue accounts you might have, and information about any court judgements against you.
These are added together to give an overall picture of your ability to repay a loan.
You’re entitled to a free copy of your credit report every three months from a Credit Reporting Bureau (CRB).
The three main Credit Reporting Bureaus in Australia are:
- Equifax (previously known as Veda) –
- Experian Australia Credit Services -
- illion (formerly Dun & Bradstreet) -
Knowing your credit score will help you estimate your personalised interest rate and can help you get clever with your money.
What you'll need to apply
To apply for a personal loan you'll need to provide proof of your identity and income. As a guide, it helps to have these details ready before you apply:
- Your employment and income details (e.g. payslips)
- Your Australian driver's licence
- Your Medicare card
- Your passport
- Details of your existing debts