Understanding Personal Loans and How They Work
Key Takeaways
Personal loans provide a lump sum repaid in fixed instalments over a set term.
They differ from credit cards, home loans, auto loans, and business loans in purpose and structure.
Lenders assess income, expenses, employment stability, and credit history before approval.
Borrowers should understand fees, interest rates, and comparison rates to avoid costly surprises.
Personal loans can be secured or unsecured, with fixed or variable interest options.
Taking out a personal loan can be a smart way to manage big expenses without draining your savings. Whether it’s consolidating debt, covering medical bills, paying for a wedding, or funding home improvements, personal loans give you access to a lump sum of money that you repay in regular instalments over time. But before signing any agreement, it’s important to understand how they work, what lenders look for, and what costs are involved.
This guide breaks down everything you need to know about personal loans — from how they differ from other types of credit, to what happens after you apply, and what terms you’ll often come across. It’s designed to help you make confident, informed decisions when borrowing and to avoid common pitfalls that can lead to unnecessary costs later on.
What is a Personal Loan?
A personal loan is a form of credit where you borrow a fixed amount of money, agree on a term (often from one to seven years) and repay via regular repayments, including interest and any fees. You can use it for many non-housing, non-business purposes — for example, a car, a holiday, home improvement or consolidating debt.
In short, a personal loan gives you a lump sum now, which you pay back over time under a contract.
How It’s Different from a Credit Card
While both let you borrow, a credit card is revolving credit with a credit limit, where you can borrow, repay and borrow again. A personal loan is usually “closed” – you borrow a set amount once and make fixed repayments until it’s paid off. Also, interest rates on personal loans are typically better than credit cards, and repayments are more predictable.
📖 Related Read: Personal Loans vs. Credit Cards: Which Is the Better Option?
How It’s Different from a Home Loan
A home loan is secured by your property, has much larger amounts, longer terms (10-30 years commonly) and is directly tied to purchasing real estate. A personal loan is unsecured (or sometimes secured by a lesser asset), for smaller amounts and shorter durations. The risk and regulatory frameworks differ significantly.
📖 Related Read: Understanding the Mortgage Process in Australia
How It’s Different from a Business Loan
Business loans are for commercial purposes—expanding a business, buying equipment, investing in operations—and lenders will assess business financials, cash flow, and business plans. A personal loan is assessed based on your personal income, expenses, and credit history, and is for personal (non-business) use.
📖 Related Read: Compare Australia Business Loan Rates
How It’s Different from an Auto Loan
An auto loan (or car loan) is specifically for purchasing a vehicle and often uses the vehicle as security (making it a secured loan). Repayments and structure may differ (sometimes balloon payments, different loan terms). A personal loan can be used for a car purchase too, but remains more flexible and is not always secured by the vehicle.
What Can You Use a Personal Loan For?
Personal loans can be used for:
Home improvements
A car or used car purchase
A holiday or big event
Debt consolidation (merging multiple debts into one)
Unexpected major expenses (medical, appliances)
What You Usually Can’t Use a Personal Loan For
While uses vary by lender, most lenders will exclude using a personal loan for things like: business investment, property/purchase of real estate, paying for college tuition (in many cases), or ongoing living expenses, which indicate you don’t have the capacity to repay.
How Do Personal Loans Work? The 5-Step Process
Step 1: Application (What you’ll need to provide)
You’ll fill out a loan application with details such as your identity (driver's licence, passport), your income (payslips, bank statements), your expenses, existing debts, employment status, proposed loan amount and term.
Step 2: Assessment (What the lender checks)
The lender will perform a serviceability assessment: checking your income versus expenses, existing liabilities, credit history, employment stability, and whether you can comfortably repay without hardship. They will also look at your credit report and history of repayments.
Step 3: Approval (Receiving your loan offer)
If you pass the assessment, you’ll receive an offer detailing the loan amount, interest rate, comparison rate, term, fees, repayment schedule, and security (if applicable).
Step 4: Funding (Getting the money in your account)
Once you accept the offer and sign the contract, funds are deposited into your nominated account. This may take a few days or sometimes faster, depending on the lender.
Step 5: Repayment (Your loan term and schedule)
You make scheduled repayments (monthly, fortnightly), including principal plus interest and fees, until the balance reaches zero. Early repayments may be allowed (often without fee) but check the contract.
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What Are the Types of Personal Loans?
There are several types of personal loans that you’ll find:
Secured personal loans: where you provide an asset (for example, a car) as collateral, which can reduce interest rates since the risk to the lender is lower.
Unsecured personal loans: no specific asset pledged as security; higher risk to the lender and often a higher interest rate.
Fixed-rate loans: interest rate stays the same for the term of the loan; repayments are predictable.
Variable-rate loans: interest rate can change over the loan term—repayments may increase or decrease depending on rate movement.
Key Terms You Must Understand
Principal: The amount you borrow.
Interest rate: The cost of borrowing, usually expressed as an annual percentage.
Comparison rate: A rate published to show the “true cost” of the loan, including interest plus most fees, allows comparison between loans.
Loan term: How long you have to repay the loan. Shorter terms usually mean higher repayments but less interest total; longer terms lower repayments but more interest.
Establishment fees and ongoing fees: Setup fees, monthly service fees, early repayment fees or default fees may be included—always check the fee schedule.
Who is Eligible for a Personal Loan in Australia?
Standard Eligibility Criteria
You must be of age (usually 18+).
You must be an Australian citizen or permanent resident (or hold an acceptable visa), depending on the lender.
You must have a stable income and employment status; lenders want to see you can repay.
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The Role of Your Credit History
A good credit history improves your odds of approval, may lead to lower interest rates and better terms. If your history is limited or has issues, you may still get a personal loan, but expect higher rates or additional conditions.
Frequently Asked Questions (FAQs)
How much can I borrow with a personal loan?
It depends on income, existing debts and serviceability assessment. Some lenders offer from a few thousand dollars up to $70,000 or more, depending on the purpose and security.
How long does it take to get a personal loan?
Many lenders now offer online applications and fast approvals. Once approved, funding can arrive in your account within 24–48 hours.
How do I apply for a personal loan?
Choose a lender, gather your documents (ID, income proof, expenses, debts), apply online or in-branch, review the offer, sign and receive funds.
What is the difference between an interest rate and a comparison rate?
The interest rate is the rate you pay on the principal; the comparison rate includes most fees and gives a more accurate cost of the loan. Always compare rates when shopping.
Can I get a personal loan if I’m self-employed?
Yes, but lenders will likely require additional documentation—tax returns, business statements, proof of ongoing income, possibly a minimum operating period.
How does a lender decide if I’m approved?
They look at your income, expenses, debts (including credit cards, existing loans), employment stability, credit history, and whether new repayments will cause financial hardship.
Final Thoughts
Whether you’re planning a major purchase, consolidating debt or managing an unexpected expense, understanding how personal loans work in Australia puts you in control. Remember to compare carefully, understand all fees and terms, borrow only what you can comfortably repay and shop around for the best deal. With the right approach, a personal loan can be a useful financial tool rather than a financial trap.
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