A Beginner's Guide to Personal Loans - What You Need to Know

Need to borrow funds, but not sure where to start? Here’s what you need to know about getting a personal loan in Australia.

What is a personal loan?

A personal loan is a financial arrangement that allows individuals to borrow money from a lender for personal use. After the lender has transferred the borrowed funds, borrowers can use these finances however they like. The borrowed amount (plus the interest) is repaid via regular repayments to the lender over the loan term.

What can a personal loan be used for?

Personal loans are the most versatile type of loan available — they can be used for virtually anything, from funding a car purchase, to paying off outstanding debts. Some of the most common uses for personal loans include:

• Paying for the cost of a wedding
• Accessing funds for a holiday or vacation
• Debt consolidation
• Financing a home improvement or renovation project
• Payment for medical bills 

Personal loans are not only for individuals who lack sufficient personal finances — borrowers can take out a personal loan, even if they do have the personal finances to support the purchase. A personal loan can provide greater flexibility across finances and avoid dipping into personal savings.

Types of personal loans – secured vs unsecured

There are two main types of personal loans — secured and unsecured. There’s a big difference between the two and suitability for each will depend on factors like how much you need to borrow and your ability to make repayments.

With a secured personal loan, borrowers use a personal asset as security for the loan. Examples of assets that can be used as security for a personal loan include home equity (the value of a home that you have paid for and own) or a car. Assets used as security for the loan typically allow borrowers to access lower interest rates and higher borrowing amounts. However, if borrowers are unable to make repayments on the secured personal loan later on, the lender can claim possession of the assets used as security to recoup the outstanding amount.

Unsecured personal loans are the opposite – no assets are used for security for the loan. Individuals who choose to take out an unsecured personal loan will not need to put up any collateral. As this results in a higher risk for lenders, an unsecured personal loan may come with higher interest rates, less favourable borrowing terms, and stricter loan application requirements.

How to get a personal loan

Getting a personal loan in Australia is relatively straight forward, particularly if you work with a broker.  

Before you do anything else, start by assessing how much money you need to borrow. While personal loans are suitable for almost any use, they are ideal for smaller amounts — most lenders offer borrowers up to $100,000 with a secured personal loan or up to $50,000 with an unsecured personal loan.

You may also want to find out if there is a loan that’s better suited to your needs. Aside from personal loans, there are other loans specifically tailored to motor vehicle purchases or buying a home — these loans may offer better terms to suit your borrowing needs.

The next step is to research your options. You can go directly to a bank, or you can approach a loan broker to source personal loan options from private lenders. It’s important to find a good balance between favourable borrowing terms and a reputable lender to avoid costly consequences down the line. Once you’ve shortlisted the available options, you can request personal loan quotes and make comparisons between each of them to find one that best meets your needs and financial capability.

When you’ve selected a lender to borrow from, all that’s left to do is to apply for the personal loan with your details – lenders typically require proof of your personal identity as well as financial information in the form of bank statements or payslips. Upon getting approved for the loan, the lender will transfer the requested amount to your account for you to use.