Personal loans can help you manage larger expenses by spreading the cost over regular repayments. Whether you’re planning a major purchase or consolidating existing debts, understanding your borrowing options is an important first step.
“How much can I borrow and what will it cost?”
With different interest rates, fees and repayment terms available, comparing personal loans can help you find an option that suits your budget.
Comparing personal loans can help you find an option that suits your budget.
Choosing the right loan involves more than finding a competitive interest rate. The repayment structure and total borrowing costs can also make a significant difference.
How personal loans work
A personal loan allows you to borrow a set amount of money and repay it over an agreed period, usually through regular principal-and-interest repayments.
Depending on the lender, personal loans may be used for:
- Purchasing a vehicle
- Home improvements and renovations
- Travel and other major expenses
- Consolidating existing debts
- Purchasing furniture or household goods
Most personal loans have a fixed repayment term, with interest and fees adding to the total amount you repay.
Secured vs unsecured personal loans
Personal loans can be secured or unsecured, depending on whether an asset is used as security for the lender.
The main differences include:
- Secured personal loans: Use an eligible asset as security and may offer lower interest rates
- Unsecured personal loans: Don’t require an asset as security but may have higher interest rates
- Loan amounts: Borrowing limits can vary between lenders and products
- Approval requirements: Lenders assess income, expenses and credit history for both loan types
With a secured loan, the lender may be able to repossess the asset if repayments aren’t met. It’s important to understand this risk before borrowing.
Understanding personal loan costs
The interest rate is important, but it isn’t the only cost to consider when comparing personal loans.
Other factors can include:
- Comparison rate: Includes the interest rate and certain fees to help compare loan costs
- Establishment fees: Upfront charges for setting up the loan
- Ongoing fees: Monthly or annual charges, where applicable
- Loan term: The period over which you repay the amount borrowed
- Early repayment fees: Charges that may apply if you repay the loan ahead of schedule
A longer loan term generally means lower regular repayments but more interest over time. A shorter term can reduce interest costs while requiring higher repayments.
Using a personal loan to consolidate debt
Debt consolidation involves combining multiple debts into a single loan, potentially making repayments easier to manage.
This may help you:
- Replace several repayments with one regular payment
- Keep track of your outstanding debt
- Access a different interest rate or repayment term
- Establish a clearer repayment schedule
However, consolidating debts doesn’t automatically reduce borrowing costs. A longer repayment term or additional fees could mean paying more interest overall.
Applying for a personal loan
Understanding the application process can help you prepare before approaching a lender.
1. Check your borrowing capacity
Review your income, expenses and existing debts to understand how much you can comfortably repay.
2. Compare lenders and loan features
Consider interest rates, fees, repayment terms and whether a secured or unsecured loan suits your needs.
3. Prepare your documents
Lenders generally require identification, proof of income and details of your financial commitments.
4. Submit your application
The lender will assess your financial position and credit history before making a lending decision.
5. Review the loan agreement
Check the repayment amount, total borrowing cost and loan conditions before accepting an offer.
How lenders assess your application
Personal loan approval depends on your financial position and ability to manage repayments.
Lenders generally consider:
- Your income and employment stability
- Regular living expenses
- Existing loans and credit card limits
- Your credit history
- The amount and purpose of the loan
- Your ability to meet repayments over the loan term
Even if you qualify for a particular amount, borrowing less may help reduce your repayments and total interest costs.
Common personal loan mistakes to avoid
When choosing a personal loan, common mistakes can include:
- Borrowing more than you need
- Comparing loans based only on the interest rate
- Choosing a longer term without considering total interest costs
- Overlooking establishment and ongoing fees
- Applying for several loans without considering the effect on your credit history
- Not checking early repayment conditions
These mistakes can increase borrowing costs and make repayments harder to manage.
Working with a mortgage and finance broker can help you compare personal loan options and understand the repayment commitments before applying.
Ready to explore your personal loan options?
If you’re considering a personal loan, understanding your borrowing options is a sensible place to start.
We can help you:
- Understand how much you may be able to borrow
- Compare personal loans from different lenders
- Explore secured and unsecured finance options
- Understand interest rates, fees and repayments
- Navigate the personal loan application process