The ultimate guide to personal loans
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By Rebecca Pike, money expert at Finder
If you need some extra cash for a big spend, you might be thinking about taking out a personal loan. While it can be a great solution for a lot of people, it’s not necessarily always the right decision.
It’s important to understand exactly what you can use a personal loan for and what you should look out for when choosing a personal loan.
What is a personal loan?
Put simply, personal loans are where you borrow money from a bank or other loan provider to pay for large personal expenses. You’ll receive the loan to make your purchase and then you make monthly repayments of the loan amount (plus interest and any fees) until the loan is paid off.
Unlike a home loan, which is specifically designed to pay off a property, a personal loan offers personalised interest rates based on your credit score, lower loan amounts and shorter repayment terms.
You can see from lenders like Fair Go Finance that interest rates differ based on factors like loan amounts and loan terms.
What can I use a personal loan for?
A personal loan can be used for those big expenses where you want to spread the cost out over time. Personal loans can be used to pay for things like:
You will normally need to tell the lender what you intend to use the loan for. You should explore your options to assess whether a personal loan is right for you, or whether other options like a credit card, line of credit or home loan redraw are more suitable.
Secured vs unsecured personal loans
There are 2 types of personal loans:
A secured personal loan is where the money you borrow is backed by an asset. It means that if you can’t repay the loan, the lender could claim the money back by taking that asset. In return for that extra security, the bank will typically offer you lower interest rates on the loan.
Security on the loan could be what you’re taking out the loan to buy (like if you’re using the loan to buy a car), or it could be another valuable asset (like jewellery or money).
As you might expect, an unsecured personal loan is not backed by an asset. Although you don’t put your belongings at risk, your interest rate will be higher.
What to avoid when applying for a personal loan
1. Picking a loan based on the interest rate
You will likely find that the advertised interest rate will change once the lender has more information. You’ll see a more personalised interest rate based on your credit score and the loan amount you’re applying for. It’s important to do a detailed comparison to ensure you know the rate for your circumstances.
Not only that, the interest rate isn’t the only additional cost to your loan. Be sure to check for any other fees and charges, like application fees and ongoing/monthly fees.
2. Applying for too much/too little
Don’t apply for more than you need, or you could end up paying additional interest on money that you didn’t need to borrow.
Also, try to avoid applying for less than you need unless you know you can cover the rest of the cost. Applying for additional money could be costly and affect your credit score, which brings us to the below.
3. Applying for multiple loans
Every time you apply for credit it will show up on your credit report. Although one or two applications won’t be a big deal, submitting multiple applications in a short space of time will begin to affect your credit score, regardless of whether it’s the same lender, different lenders or whether you’re approved or rejected.
How do you apply for a personal loan?
Before you apply for a personal loan, make sure the loan you’ve chosen is manageable. Lenders like Fair Go Finance provide a calculator so you can see how much your monthly repayments will be.
You should also check your eligibility. Typically, eligibility for a personal loan depends on factors like:
Being over 18
Your residency status
Your income
Your credit score
Any existing debt
The purpose of the loan
If you’re eligible and you’re confident in being able to service the loan, most lenders today will allow you to .
Ensure you have the right information with you to complete the application. You may need to provide payslips, bank statements and other documentation to prove your ability to repay the loan.
Some personal loan providers can offer approval instantaneously, but others may take a few days.
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