Personal Loans

One of the great things about personal loans is their flexibility. Pretty much anything you need to do – within reason – a personal loan could help cover it. Planning a wedding and don’t know how you’re going to pay for it? A personal loan could be the answer. Want to take off on an epic adventure? A personal loan could make that happen. Whether you’re renovating the house or consolidating debt, a personal loan could be the solution to your financial fix.

personal loans
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A GUIDE TO

Personal Loans

But of course, you need to know how personal loans work if you want to make them work for you. Just like any kind of finance option, there are right ways and wrong ways of accessing personal loans. You not only need to choose the right loan to suit your needs, you also have to make sure you can actually afford to pay it back. Never fear, Mate is here to help. Not only do we make it easy for you to compare personal loans, we also tell you all need to know about them in this handy guide.

Personal Loan Essentials

What is a personal loan?

With a personal loan, you borrow a certain loan amount, which you then pay back over an agreed upon period of time. Depending on the personal loan you choose, you will either pay a variable rate of interest or fixed rate of interest on the amount you borrow. If you opt for a variable rate personal loan, the rate you pay – and therefore your repayment – may change over the loan term. If you choose a fixed rate personal loan, your rate is locked in, so your repayment will always remain the same.

You may also choose between a secured or unsecured personal loan. This determines whether you put up any collateral on the loan, and can affect the cost of the loan and how easy it is to get approved. Why? With a secured loan, collateral makes it less of a risk for the lender, which can reduce the amount charged in interest, while also making it easier for some applicants to get approved. However, there are benefits to unsecured personal loan options too. More on that later.

personal loan basics

What can you do with a personal loan?

Personal loans tend to be pretty flexible, which is why they’re such a popular option. As long as you meet certain eligibility criteria, you can choose from loan amounts big and small, to then pay off the loan over a period that suits you. That could mean borrowing anywhere between $1,000 and $80,000, over a period of one to seven years. As long as the loan allows it, you can choose your repayment frequency – whether that’s weekly, fortnightly or monthly – while making extra repayments when you can to reduce the amount of interest you pay back overall.

As for what you do with that money, the world is your oyster. While the lender may specify certain ways in which the loan can’t be used, you will generally have quite a wide scope outside of those conditions. Perhaps you’ll use your personal loan to...

Jet off on holiday

With a personal loan, you could cover the cost of your flights and accommodation, your cruise or tour, your spending money and so much more.

Plan your dream wedding

Whether you envision an intimate ceremony in some far-flung tropical destination or a big rowdy party with all your friends and family in attendance, a personal loan could cover the never-insignificant cost of planning your nuptials.

Renovate your home

From a simple refresh to a full-on renovation, covering the cost of renovating your home is made so much easier with a personal loan. Need new furniture or white goods? A personal loan could cover that too.

 

Get some new wheels

While you may find some lenders ask that you apply for a car loan to cover the cost of a car purchase, a personal loan may be an option for others. From cars to campervans, motorbikes to boats, a personal loan could get you moving, no matter where you want to go.

Cover medical bills

Getting sick can get expensive. Whether it’s you, one of the kids, or even the family pet that gets sick or injured, if you need to cover the cost of medical bills, a personal loan could help take some of the stress out of the situation.

Pay off a large expense

Emergencies happen, and unfortunately, they tend to be expensive. Whether you need emergency root canal treatment or the boiler explodes in a spectacular fashion, a personal loan could provide the money you need to cover it.

 

Consolidate your debt

Building debts can cause untold stress. With a personal loan, you could consolidate multiple debts, so you just have one loan and one manageable repayment. You may also save on interest and fees by making the switch.

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Benefits of a Personal Loan

So, why should you choose a personal loan over another finance option, such as a credit card? There are many benefits of choosing a personal loan – but of course, whether this option will benefit you will depend on your situation. Let’s take a look to see if any of these benefits could apply to you.

Easy to apply for

Most personal loans offer online application, making it super easy to apply. You just need to make sure you have the correct information to hand – and that you’re eligible – and you could run through your application in 10-15 minutes online. From there, you could benefit from fast approval and fast access to your funds.

You can make it work for you

As long as you choose the right personal loan and meet the lender’s criteria, you can choose how much you want to borrow, and how long you need to pay it back. This allows you to take advantage of a repayment schedule that suits your budget, while enjoying access to funds when you need them.

You can do what you want with the money

While some lenders may have conditions regarding what the loan can and can’t be used for, most loans are pretty flexible. This allows you to borrow money for what you need, whether that’s school fees or a new kitchen.

It provides a fixed repayment schedule

While the repayment amount may vary, you still have a repayment schedule to stick to. If you struggle to pay off your credit cards because you lack the discipline to make regular payments, a personal loan tells you what you need to pay off and when. This gives you incentive to chip away at your debt, making sure it is paid off within a specified period.

It could reduce debt stress

While every situation is different, you could reduce debt stress with the right personal loan. Instead of having multiple debts with multiple repayment dates, each earning interest at a different rate, a personal loan could consolidate all those debts making them easier to manage.

It could save you on interest

If you have balances piling up on your credit cards, it’s likely interest is piling up too. Owing money on credit cards can get expensive, especially on cards with rates ranging between 20% and 25% p.a. By paying off those balances with a personal loan – and closing the cards afterwards – you could save on interest, to get back on track with your finances.

You could improve your credit rating

When you treat credit correctly, your credit rating should improve. Always making your repayments on time, and paying off your personal loan could result in your credit score increasing, making it easier to get approved for credit in the future. Note, this is not a quick fix, but something you work on over time.

PERSONAL LOAN TYPES

Types of Personal Loan

Understanding the types of personal loans out there should help you understand what will work best for you. While there are other types of personal loans available, here are some of the most common options.

Secured Personal Loans

With a secured personal loan, the loan is secured against some form of collateral. This is usually the item you are purchasing, but may be some other form of collateral as well. While having security on the loan can make it easier to get approved for, it also means that if you don’t repay the loan, the lender may repossess whatever the loan is secured against, and sell it to cover the cost of your unpaid debt.

Pros

  • Tend to charge less in interest and fees
  • May be easier to get approved for

Cons

  • If you default on your loan, you could lose your collateral

Unsecured Personal Loans

With an unsecured personal loan, there is no security placed against the loan. This can make it a more flexible option for borrowers, but can come with downsides due to the increased risk for the lender. That means, you may pay a higher rate of interest on this type of loan, and unless you have excellent credit, you may find it more difficult to get approved.

Pros

  • Usually very flexible
  • Could work for you if you don’t have any assets to place up for security
  • May offer lower interest rates than other options such as credit cards

Cons

  • You may pay more in interest and fees compared to a secured loan option
  • While there is no collateral to lose, the lender may still take legal action against you if you default

Lines of Credit

While not strictly a personal loan, a line of credit is an alternative financing option that works in a similar way. When you have line of credit, you have access to funds when you need them. But, unlike a personal loan where you pay interest on the total sum borrowed, with a line of credit you only pay interest on the portion you have used.

In terms of repayments, there is no fixed repayment schedule or loan term. That means, as long as you stay within your credit limit, make the minimum repayment each month, and stick to the conditions set out by the lender, you could keep your line of credit indefinitely.

Pros

  • Only pay interest on the amount you have borrowed
  • Could work for you if you want to borrow smaller amounts over time
  • You don’t have to reapply for more funds, as long as you keep paying down what you borrow
  • Some lines of credit feature a debit card, providing easy access to funds

Cons

  • May not work well if you don’t have the discipline to keep paying down the loan
  • With no pre-set loan term, you could stay in debt longer
  • Interest rate may be higher than other types of personal loans

Debt Consolidation Loans

A debt consolidation loan is designed to help you consolidate your debt. With this type of loan, you can borrow money to pay off other debts, so you effectively roll all those debts into one. You then pay off the loan as you would any other personal loan, to clear your debt over time.

Pros

  • Could help you save on interest if you have lots of high interest debts, such as credit cards
  • Reduce stress by only dealing with one repayment instead of many
  • Could help you improve your credit rating over time, as long as you make all your repayments on time

Cons

  • By stretching out your debt, you could end up paying more in interest and fees overall
  • If you continue to spend on your cleared credit cards, or slip back into bad habits, you could end up further in debt

Case Study

Ben has $10,000 in credit card debt over two cards. On his first credit card, he owes $7,500 and pays 18% p.a. interest. On his second credit card, he owes $2,500 and pays 22% p.a. interest.

If he doesn’t put anything else on the cards and pays off $175 each month on card 1 and $65 each month on card 2, it will take him 5 years and 8 months to clear the debt on card 1, and 5 years and 5 months to clear the debt on card 2.

However, if Ben takes out a personal loan with a rate of 10% p.a. to pay off those credit cards, he would repay $212 per month over a period of 5 years.

Not taking into account fees in either option, he would repay a total of $12,748 opting for a personal loan (paying out $2,748 in interest), compared to a total of $16,013 sticking with his credit cards (paying out $6,013 in interest).

By taking out a personal loan, not only would Ben pay less each month, he would also pay off his debt faster, while saving $3,265 in interest.

Monthly Repayment Interest Paid Overall Total Amount Paid Overall
Personal Loan $212 $2,748 $12,748
Credit Cards $240 $6,013 $16,013
fees

Personal Loan Interest

While it would certainly be nice if we could simply borrow money for free whenever we needed it, that’s not the way it works in the grownup world of finance. Lenders lend money so they can make money. Which means if you want to borrow money, you’ll need to pay for the privilege. While there will typically be fees to pay – we’ll get to those in a minute – the main cost of borrowing money comes from interest.

When comparing personal loans, you will likely notice each personal loan option comes with an advertised rate and a comparison rate. What are these rates exactly? And which one should you pay attention to? The advertised rate is the interest rate the lender will apply to the loan, while the comparison rate covers both interest and standard fees. As this comparison rate is based on an industry standard ($30,000 borrowed over five years), it can help you compare loan options more effectively.

However, there are two important factors to note here. First up, that comparison rate is great for comparing options side by side, but it will not tell you the true cost of your loan unless you plan on borrowing $30,000 over five years. Secondly, the rate you pay in interest may not be the rate specified on the loan. The interest rate you pay will likely be determined by the lender according to factors such as loan amount, loan term and risk.

 

INTEREST RATE

Fixed Rate vs. Variable Rate

In terms of interest, you will have an important decision to make when choosing a personal loan. Personal loans come with either a fixed rate or a variable rate, so you will need to understand both options to choose the right one for you.

Fixed Rate Personal Loan

With a fixed rate personal loan, the rate of interest is fixed throughout the loan term. So, no matter what else is happening with interest rates elsewhere, your interest rate will remain the same.

Pros

  • As your repayments will always be the same, this makes budgeting easier
  • If interest rates rise, you will be protected

Cons

  • Interest rates on fixed rate personal loans can be higher than variable rate personal loans
  • If interest rates fall, you will miss out
  • Some fixed rate personal loans don’t allow for extra repayments

Variable Rate Personal Loans

With a variable rate personal loan, the rate you pay in interest may fluctuate over the course of the loan. However, these options tend to be more flexible, offering benefits such as extra repayments and redraw.

Pros

  • Typically lower rates and fees than fixed rate personal loans
  • If interest rates fall, your repayments may fall as well
  • You may be able to make extra repayments to pay off your loan faster, saving you in interest overall

Cons

  • It can be more difficult to budget not knowing how much your repayments will be
  • If interest rates rise, your repayments will likely rise as well
FEES

Personal Loan Fees

When it comes to personal loans, it’s usually a matter of how much you will pay in fees, rather than if you will pay them. Which makes it all the more important to compare your options. Don’t fret though, that’s exactly what Mate is here for. Allowing you to compare essentials such as fees and interest, Mate helps you find the loan that works best for your wallet.

Here are some of the most common personal loan fees to keep an eye out for.

  • Application Fee

    This upfront fee, also referred to as an establishment fee, is charged by the lender to set up the loan. While some lenders don’t charge an application fee of any kind, others can reach $600 and more. If you find a personal loan with a high application fee, make sure this cost is evened out with a great interest rate and no ongoing fees. Similarly, a loan with no application fee may cost more in interest and ongoing fees, so compare overall costs carefully.

  • Ongoing Fees

    Sometimes referred to as a monthly fee or service fee, these ongoing fees are charged at regular intervals throughout the life of the loan. These fees can seem low but will add up over time. For example, a $10 monthly fee on a five year loan comes to $600 overall.

  • Early Exit Penalties

    If you opt for a fixed rate loan and choose to pay off your loan early, you may be charged a fee. On both variable rate loans and fixed rate loans, there may be fees applied to extra repayments, so if you think you will want to pay off more than your standard repayment, make sure you will not pay a penalty for doing so.

  • Late Payment Fee

    If you fail to make a repayment on time, your lender will likely charge you a late payment fee. Coming in at $25-$30 a pop, these are best avoided. If you have trouble remembering to pay your repayment, try setting yourself a reminder on your phone, or set up an automatic payment from your bank account.

payment

What happens if you miss a loan repayment?

If you are late making a repayment on your loan, your lender will likely charge a fee. You will then have to pay this fee, alongside the amount you owe.

However, if you miss a repayment altogether, this could be very bad news for you. Missed repayments or late repayments past a certain due date may be recorded on your credit file, which could make it more difficult for you to get approved for credit in the future.

If you are struggling to repay your loan, contact your lender to talk over the situation and find a solution. It’s better to do this sooner rather than later to avoid fees stacking up and dirty marks on your credit file.

FEATURES

Personal Loan Features

As you compare personal loans, another factor to keep in mind is the features on offer. Personal loan features can offer more flexibility, allowing some loans to meet your needs better than others. When comparing your options, think about how you will use the loan, as this should allow you to find the loan with the features that best suit you.

  • Repayment Frequency

    Some personal loans allow for repayments to be made weekly, fortnightly or monthly. By matching up your repayment date with your payday, this feature can make budgeting easier.

  • Extra Repayments

    Choosing a personal loan that allows extra repayments with no fee could save you big in the long run. By paying off more of your loan, you will pay it back faster, to save on interest overall.

  • Redraw

    If your personal loan allows you to make extra repayments, you may also have the option of redrawing them should you need to. This is called a redraw facility, and can work well if you need access to some fast cash as you pay off your loan. Note, fees may apply.

COMPARING

Comparing Personal Loans

With a better understanding of how personal loans work, the job of comparing your options becomes oh-so much easier. However, if you want to do a good job in your comparison, you’ll need to start by asking yourself a few questions.

  • How much do you need to borrow?

    While the amount you’re approved for will depend on your creditworthiness, each loan will have a maximum and minimum loan amount as a starting point.

  • How long do you need the loan for?

    Loan terms range from one year to seven years. The amount of time you’ll need to pay it back will depend on how much you borrow, and how much you can afford to pay back each month.

  • When do you need the money?

    Online application can certainly speed up the process of applying for a personal loan, but fast application doesn’t always equate to fast access to funds. If you need money in a hurry, consider how long it will take from application to draw-down.

  • Do you want the option to access more money?

    Taking out a personal loan provides access to a fixed amount, whereas a line of credit can be a little more flexible. However, if you choose a personal loan that allows you to make extra repayments and offers a redraw facility, this could provide access to extra cash should you need it.

  • Do you think you’ll make extra repayments?

    Making extra repayments on your loan can help you pay it off faster, while paying less in interest. If you think this might be an option, look for a personal loan that allows you to make extra repayments for no fee.

afford loan

Loan Affordability

There’s no denying a personal loan can be a pretty handy financial tool, but you need to make sure you can actually afford it if you want to make it work for you. So, while you may start off by asking yourself how much you need to borrow, you also need to consider how much you can afford to borrow if you want to avoid getting into trouble.

Start by looking at all your incomings and outgoings. Using an app can make this task vastly easier. You can then work out where you could maybe cut back, to then see how much you could afford to pay out on a personal loan repayment each month.

Then, using a personal loan calculator, you can play around with repayment schedules and loan amounts to find an option that fits your budget. Be sure to take into account fees when working out the overall affordability of the loan, as you will need to cover these as well.

Tip

Try to choose the shortest possible loan term that provides a repayment schedule that will be easy to manage. Stretching out the loan will make repayments smaller, but you will pay more in interest on the loan overall.

 

Say you were to borrow $15,000 at a rate of 10% p.a., here’s how much interest costs would vary according to the loan term.

 

Loan Term Monthly Repayment Cost in Interest Overall Cost
3 years $484 $2,424 $17,424
5 years $319 $4,122 $19,122
7 years $249 $5,917 $20,917
COMPARING

What should you look for when comparing personal loans?

  • 1
    Interest

    Looking at interest is a good place to start when comparing personal loans, as it will affect how much you pay back on the loan. Use a calculator to compare options, but bear in mind the rate shown on the loan may not be the rate you get. This may be determined by the lender, according to factors such as your creditworthiness.

  • 2
    Fees

    Fees can really stack up, especially on longer loans. While there are fees you can easily avoid, like late payment fees, make sure the fees you have to pay are as low as possible. Also bear in mind that loans with high upfront fees might have lower ongoing fees, and vice versa, so weigh up the total cost of fees as a whole to compare your options more efficiently.

  • 3
    Loan Amount

    Whether you’re only looking for a small loan, or you need something much more substantial, make sure the options you are interested in provide loans within that range. Be aware that the amount you are approved for will depend on the lender, who will look at factors such as your credit history to decide.

  • 4
    Loan Term

    As you can see from the above example, the loan term – the period over which you repay the loan – can greatly affect how much you pay back. Lenders tend to offer loans over one to seven years, but think about how long you actually need to repay your loan, and consider reducing the loan amount if you cannot afford to pay it all back within a reasonable period of time.

  • 5
    Affordability

    A personal loan has to be affordable – for the good of both you and the lender. Use a personal loan calculator to play around with repayment schedules to find one that fits your budget, and only borrow what you can afford to pay back.

  • 6
    Flexibility

    Some personal loans offer more flexibility than others. How flexible they are usually depends on the features they offer. Features can include the ability to make extra repayments with no fee, to redraw those extra repayments if needed, and the ability to choose your repayment frequency.

  • 7
    Suitability

    Does the personal loan suit your needs? Comparing your options on Mate will present you with a wide range to choose from, helping to make it easier to find a personal loan that best suits your needs.

  • 8
    Eligibility

    On each personal loan, the lender stipulates certain eligibility requirements, usually regarding your age, income and credit history. Making sure you meet these requirements can help you avoid having your application rejected.

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applying for personal loan

Applying for a personal loan?

All set? Let’s make sure. Before you apply for a personal loan, make sure you have done the following:

  • Create a budget to work out an affordable repayment schedule
  • Compare, compare, compare your options
  • Check your credit
  • Read the PDS of the loan you want to apply for
  • Make sure you’re eligible
  • Collect everything you need to apply
HOW TO APPLY

What do you need to apply?

What you will need to apply for a personal loan will depend on the lender. However, most will ask you to provide:

  • 1
    Proof of identity

    Such as your passport, driver’s license or Medicare card

  • 2
    Proof of income

    Usually in the form of pay slips

  • 3
    Financial details

    Including details of your income, assets, debts, expenses and liabilities

  • 4
    Additional details

    References, for example, your landlord

wallet

The lender may ask for details of your monthly expenses, as this will give them a better view of whether you will be able to afford the loan repayments. You may also be asked to provide bank statements to the lender to show how well you save, how you use your credit card, and how money goes in and out of your account.

 

How can you improve your chances of getting approved?

While you may be disappointed to hear this, there is no short-cut to getting approved for a personal loan – or any type of finance, for that matter. However, you can improve your chances of being approved if you better understand what lenders look for as they assess personal loan applications.

Your Credit History

Potential lenders will look at your credit history to determine how much of a risk you are. If you have a good relationship with credit, you are more likely to get approved. On the other hand, if you have defaults and rejected applications on your credit file, you might pay more in interest on the loan, or your application may be denied.

Solution

Check your credit file before you apply. If there are any errors, you can apply to have them removed. If your credit isn’t great, you may want to think about taking a step back to improve your credit before you apply. Note, companies that claim to ‘clean’ your credit file are a scam. There is no way to do this legally.

Your Debt-to-income Ratio

Your lender will look at how much you bring in, as well as how much you pay out on your current debts. This is to make sure you can afford this new loan, and that by giving it to you, you won’t get in over your head.

Solution

Be honest with yourself and the lender about your incomings and outgoings. Check that the loan you are applying for is actually affordable, and consider lowering the loan amount or stretching out the loan term if it’s not.

Loan Risk

Lenders assess risk – in a big way – when determining the outcome of each loan application. Before lending to you, the lender wants to make sure you will repay what you owe. If the loan seems like too much of a risk – say if you have bad credit, if the loan amount is too high, or the repayment schedule is not manageable – the lender may reject the application.

Solution

There are many ways you can reduce risk as a potential borrower. You could opt for a secured loan option, or ask someone to go guarantor on the loan. You can make sure the loan is affordable, both in terms of loan amount and repayment schedule. And you can work on improving your credit and paying down debts before you apply.

Ready to get started?

We love your enthusiasm. Mate is ready when you are. Taking the hassle out of loan comparison, we’ll help you compare personal loans side-by-side, so you can put all of this awesome newfound knowledge to good use.