When it comes to borrowing money, Aussies have plenty of options to choose from but the most common is taking out a personal loan. According to the Australian Bureau of Statistics (ABS), there was more than $163.7 billion worth of outstanding personal loans in Australia as of March 2020.
Whether it’s to cover the rising costs of bills, buy a car, or pay for a wedding, a personal loan can be a handy way to get extra cash. However, taking out a personal loan is not a decision to be made lightly and isn’t always the right choice for everyone.
If you’re considering getting a personal loan, check out our guide on personal loans below including what you can use them for, the different types, and plenty more.
What is a personal loan?
In a nutshell, a personal loan is where you borrow a certain amount of money from a traditional bank, credit union, or online lender. You then repay the borrowed money plus interest over an agreed period of time, generally between one to seven years. Before you take out a personal loan, the interest rate is determined by the lender and then agreed upon by you.
Often, a personal loan is a cheaper option than credit cards as they typically have lower interest rates and you can borrow larger amounts. It also comes with the discipline of a repayment schedule.
What can I use a personal loan for?
A personal loan can be used for a variety of purposes including weddings, utility bills, or renovations. Below, we list some of the common reasons people take out a personal loan:
- Buy a new or used car
- Car repairs
- Debt consolidation
- Travel or holiday expenses
- Wedding costs
- Funeral costs
- New appliances
- Home repairs
- Home renovations
- Surgery costs
- Medical bills
- Vet bills
- Utility bills
- Moving costs
- Bond costs
Different types of personal loans
Generally, there are two types of personal loans: secured personal loans and unsecured personal loans. There’s no one-size-fits-all when it comes to choosing the right type of personal loan for you, as it depends on your own financial circumstances and needs.
Below, we break down what each type of personal loan means:
Secured personal loan
A secured personal loan requires you to provide an asset as collateral, or security, for the loan. This means if you don’t pay back your loan, the lender can take possession of your asset and sell it to recoup any financial losses. Some examples of assets could include a car, house, boat, art, business equipment, jewellery, or savings.
One of the main advantages of taking out a secured personal loan is they often come with lower interest rates and you can also borrow larger amounts. On the other hand, you run the risk of losing your asset if you miss your repayments and default on your loan.
Unsecured personal loan
An unsecured personal loan is where you don’t have to put up an asset to secure a loan. Instead, a lender will often determine your ability to repay the loan based on your credit history, score, and/or income. An unsecured personal loan typically comes with higher interest rates than secured loans and may require you to find a loan guarantor. According to Moneysmart, if you miss your repayments on an unsecured personal loan, the lender can still take you to court to pay back the borrowed money.
Who can get a personal loan?
While the eligibility criteria for personal loans will vary from lender to lender, there are some common requirements which include:
- Residency: You need to be an Australian citizen or permanent resident in order to qualify for a personal loan in Australia.
- Age: You must be 18 years old or over to apply for a personal loan.
- Contact details: You will need up-to-date contact details so that your lender can get in touch with you regarding your personal loan.
- Income: Most lenders require you to provide a minimum three months of income history to prove you’ll be able to repay the loan.
- Credit history: Your credit history, especially your credit score, will play an important part in applying for a personal loan. Simply put, the higher your credit score, the higher your chances of being approved for a loan. However, there are still some lenders that you might be eligible to apply with if you have bad credit. It just might mean that the interest rate will be higher and you will have to provide an asset as security.
- Banking history: Most lenders will need you to provide your banking history to help them understand your financial circumstances and determine whether you’ll be able to make the repayments.
How does a personal loan work?
Generally, the process of applying for a personal loan will look a little something like this:
- Submit an application: Apply for a personal loan from a bank, credit union, or online lender via online form or in person.
- Lender assesses your application: The lender will assess your application to determine if you are suitable for a personal loan. This might involve conducting a credit score check, confirming your employment details, and income.
- Receive your contract: If approved, you will be sent a loan contract that outlines the terms of your loan including the repayment schedule, fees, and the rate of interest. The rate of interest will be based on whether your loan is fixed or variable. You should also check if there will be any fees for making early or additional repayments.
- Receive funds: Once you sign your contract, the funds will be transferred to you.
Want to know more?
At Oiyo, we’re all about giving you the knowledge and tools to help make decisions about your finances a lot easier. If you’re after more information on personal loans, make sure to check out our other relevant articles. Whether it’s a comparison guide on personal loans or how to find the ‘perfect’ loan interest rates, there’s plenty to check out.
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Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.