What Is A Personal Loan And How Does It Work?

Life can be expensive sometimes. From unexpected medical costs, to weddings, to holidays, saving money can seem almost impossible. If you’ve got an upcoming expense and your savings are looking a little low, then a personal loan may be the solution for you. But what is a personal loan and how does it work? We’ll take you through all you need to know about personal loans so you can decide what’s right for you!

Overview:

• What is a personal loan?
  • How do they work?
  • What is a secured personal loan vs unsecured?
  • What is the average interest rate on a personal loan?
• How to apply for a personal loan
• What credit score is needed for a personal loan?
  • Does a personal loan hurt your credit?
• Is personal loan good or bad?
  • Pros and cons of a personal loan
  • Which is better, a credit card or a personal loan?
• Personal loan FAQs

What is a personal loan?

A personal loan in Australia is a type of loan that allows individuals to borrow a specific amount of money for personal use. Personal loans are typically offered by banks, credit unions, online lenders, and other financial institutions. Unlike mortgages or car loans, which are tied to specific purchases, a personal loan can be used for a wide range of purposes, including:

• Debt consolidation
• Home renovations
• Large purchases such as furniture, appliances, or electronics
• Medical expenses
• Travel/holidays
• Unexpected expenses and emergencies
• Weddings

How do they work?

A personal loan allows you to borrow money from a lender for a range of personal expenses. The borrowed amount is then paid back, with interest, over an agreed period of time (known as a loan term).

Personal loans can be secured or unsecured with either fixed rate or a variable rate:

• Fixed rate: means that the interest rate remains constant throughout the entire term of the loan term.
• Variable rate: means that the interest rate can fluctuate over the term of the loan depending on facts like the RBA cash rate.

What is a secured personal loan vs unsecured?

Whether a loan is secured or unsecured will have a different impact on the amount you can borrow, the interest rate, and the loan term.

A secured personal loan requires the borrower to provide an asset as collateral. Common assets used for this purpose include cars, property, or savings accounts. Lenders often class secured loans as lower risk due to the collateral used. Lower risk loans typically come with lower interest rates and higher borrowing capacities.

An unsecured personal loan does not require any asset to be used as collateral. Approval is based on the borrower’s creditworthiness, income, and financial situation. Unsecured loans tend to have higher interest rates in order to mitigate any risk to the lender.

What is the average interest rate on a personal loan?

The average interest rate on a personal loan can vary depending:

• Your credit score
• How much you borrow
• The lender
• The type of loan
• Current market conditions

How to apply for a personal loan

How to apply for a personal loan will depend on the lender you choose and the type of loan you apply for. However, the general steps when applying for a loan include:

1. Assess your financial situation: determine how much you need to borrow and how much you can comfortably repay.
2. Check your credit score: check your credit score to ensure you’ll be eligible for the loan.
3. Research and compare lenders: ensure you compare fees, interest rates, and loan features.
4. Prepare your documentation: ensure you have your proof of ID, proof of income, and bank statements ready.
5. Submit your loan application: submit your loan application and wait for approval.
6. Wait for approval: your lender will assess your loan application, the process of which can take a few days.
7. Review and sign your loan agreement: once approved, read through your loan agreement carefully and sign.
8. Receive your funds: once you accept the loan, your loan amount should be deposited into your nominated bank account.
9. Begin making repayments: you will need to restart paying the loan as soon as you receive the loan amount.

What credit score is needed for a personal loan?

The credit score needed for a personal loan can vary depending on the lender and the loan product. Generally, you will likely need at least an average credit score to secure a loan.
There are lenders who specialise in lending to borrowers with poor or below average credit scores. However, these lenders tend to offer loans with significantly higher interest rates in order to mitigate the risk.

It’s a good idea to check your credit score before even beginning the loan process In Australia, there are three major credit bureaus with varying credit ranges:

Does a personal loan hurt your credit?

When applying for a loan, the lender will typically perform a hard inquiry on your credit report, which can temporarily lower your credit score. Whether or not a personal loan will impact your credit score long-term will depend on how you manage the loan and your overall financial behaviour.

To ensure a loan does not negatively impact your credit score long-term:

• Avoid late payments, ensuring you are making repayments on time
• Avoid defaulting on the loan and repay it within the agreed upon loan term or earlier.
• Avoid applying for more loans than you can comfortably afford to repay, leading to unmanageable debt in the future

Is a personal loan good or bad?

Whether a personal loan is “good” or “bad” depends on your individual circumstances and how you manage the loan. As with any loan, there are both pros and cons that you should carefully consider before making any financial decisions.

Pros and cons of a personal loan

Which is better, a credit card or a personal loan?

Whether a credit card or a personal loan is better for you in depends on:

• Your financial situation
• What you need the funds for
• Your spending habits

If you need flexibility, plan to pay off your balance in full each month, and want to earn rewards or enjoy benefits like an interest-free period, then a personal loan may be the better option.

However, if you need a lump sum for a large expense, want lower interest rates, or prefer a clear repayment plan with fixed monthly payments, then a credit card may be the way to go.

Considering a personal loan? Talk to an expert loan broker today!

At Oceania, our brokers work with a wide range of lenders to secure competitive terms and personalised solutions for our clients. With a wealth of experience, our friendly team is here to help whatever your financial situation! Contact us today for more information or to get your loan application started.

FAQs

What is a fixed rate personal loan?

A fixed-rate personal loan means that the interest rate will remain the same throughout the life of the loan. A fixed-rate means that loan repayments are predictable and do not change regardless of fluctuations in the financial market.

Does a personal loan go into your bank account?

Typically, a personal loan is delivered in one lump sum to your nominated bank account. This usually occurs once the application is approved and the loan agreement is signed.

Can a personal loan be used for anything?

A personal loan can be used for a wide variety of purposes. However, the loan must be used for legal purposes. Some lenders may also have specific restrictions on how the funds can be used, so it’s essential to check the loan agreement.

Can you pay off a personal loan early?

Personal loans can be paid off early and this can help you save money in the long run by reducing the amount of interest you pay on the loan amount. However, it’s important to check your loan agreement as some lenders may impose an early repayment fee.