Guide to Personal Loans in Australia

Some lenders use risk-based pricing for personal loans, which means that the interest rate will depend on things like your credit score, income, expenses, and savings.

The typical period to repay a loan is usually between one and seven years. Paying off the loan is quicker as it saves on the interest accumulating—however be aware that some loans charge an exit fee.

The minimum amount for most loans ranges from $1000 to $5000, depending on the lender. The maximum depends on the type of loan. You can borrowup to $2 million with a secured personal loan, while an unsecured loan generally maxes out at between $60,000 and $80,000.

• Variable vs fixed rate: With a fixed interest rate, the repayments are set in stone. That means that you know precisely how much will be debited from your bank account each month in repayments. A variable interest rate means that your repayments change if interest rates go up or down. If interest rates rise, your repayments will be higher. A loan with a variable interest rate usually has no early exit fee
• Unsecured vs secured loan: A secured loan involves an asset being used as security for the loan. Often the asset is a car. If the loan is not repaid within the stipulated timeframe, the lender can repossess the asset and sell it. Secured loans generally have a lower interest rate than unsecured loans.
• Loan with a guarantor: A friend or family member guarantees the loan should you default. A loan with a guarantor may come with a lower interest rate, because the risk for the lender is reduced. Make sure the guarantor understands what they have agreed to.
• Unsecured loan: An unsecured loan does not have an asset attached as security. A guarantor may be required. If you default on that kind of loan, the lender may take you to court to seek repayment.
• Line of credit: A line of credit is a flexible loan for a defined amount of money that can be accessed as needed. It can be repaid immediately or over time. Interest begins to accrue from the moment the money is borrowed.
• Debt Consolidation Loan: This is also known as refinancing and it involves rolling multiple debts into one loan. It can be easier to manage repayments, but the interest rate and fees could potentially be higher. It could also be tempting to start spending more money, so be careful not to end up with a larger debt in the long-run. If debts are getting on top of you, contact the National Debt Helpline on 1800 007 007 for free advice on how to get back in the black.

There are many different types of loans and lenders. Find a loan that suits your circumstances and has the lowest fees and interest available.

• Shop around for lowest rate and be careful to look at comparison rate not just the interest rate. The comparison rates tallies up the interest rate and most fees. Comparison sites compares the different options, but keep in mind that most of these sites earn a commission for referrals and may not compare all of the products in the market.
• Fees: there could be an application fee, as well as a monthly service fee and a missed payment fee. Read the fine print to check for any others that could apply.
• Do the terms of the loan allow you to make extra repayments without incurring an exit fee? If you are confident that you will be able to pay off the loan faster than the timeframe allows, look for a loan that does not penalise an early repayment.
• Be aware that the longer the loan term, the more interest you will pay. Choose a term that is realistic for your financial situation.
• Loan stipulations: some loans can only be used for certain things, whereas some lenders are focused only on whether the loan itself will be repaid.
• Redraw facility: If you make extra repayments on the loan, you may be allowed to access them later on if you need to.

There are a number of steps that make up the application process, including steps that the borrower initiates. These include:

• Check your credit score first so you know what your bargaining power is and if you are likely to be successful in your loan application.
• Determine your budget based on what your needs are and your financial situation.
• Draw up a short list of lenders that meet your needs, and most importantly will lend for the project you’re wanting to complete. Some lenders only provide loans for certain purposes, such as buying a car or making home renovations.
• Choose your lender and submit your application: while lender requirements vary, the basics needed to apply are primary forms of identification, proof of income in the form of a pay slip, a bank statement or transaction listing, an employment contract, and/or a tax return.

A credit score is used by lenders to assess whether someone applying for a loan is likely to repay it. It is also known as a ‘credit rating’ and it is based on the personal and financial information about an individual in a credit report, such as how frequently you have applied for credit and whether you repaid on time.

You can access your credit score and credit report for free once every three months. Knowing your score will help you negotiate better loan terms or to understand why you have been rejected.

The lowest score is zero and the highest is either 1000 or 1200, depending on the credit reporting agency.

If there is a factual error in the information that was used to calculate your credit score, it is possible to request credit repair at no charge.

Some information that relates to missed or late payments cannot be changed. Be wary of so-called credit repair companies, as they are unlikely to deliver on their promises and charge exorbitant fees for doing things that someone could do themselves for free.