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What is a cheap personal loan rate?

If you're hunting for a cheap personal loan, a low interest rate is often one of the first features to consider. Based on RateCity’s database, an average personal loan interest rate may be between 11 and 12 per cent, per annum. If you can find an Australian lender offering a lower interest rate, you may be able to expect cheaper loan repayments.

But it’s not just the interest rate that affects a personal loan’s cost. When looking for the cheapest personal loan, you should compare:

  • Interest rates
  • Features
  • Fees and charges

Fees and charges can make a big difference to a personal loan's total cost. A low interest personal loan with high fees may cost more overall than a higher-interest personal loan with cheaper fees and charges.

One simple way to compare the overall cost of different personal loans is to look at their comparison rates.

The personal loan comparison rate percentage figure combines a personal loan's advertised interest rate with its standard fees and charges, and can be used to help narrow down your shortlist of cheap personal loan options.

Keep in mind that some personal loans may also include nonstandard fees and other costs that aren't included in its comparison rate. Also, to make sure you get great value from your personal loan as well as a cheap deal, check what extra features and benefits are offered by each lender.

How can I work out how much a personal loan will cost?

Before you start the application process for a personal loan, it’s important to figure out how much it will set you back once interest charges and other fees are added onto your loan amount. Understanding the total cost of a personal loan may allow you to make a more informed decision when choosing a loan.

As well as a personal loan's interest rate and fees, you may want to consider the length of your personal loan term. The longer your repayment term, the cheaper your monthly repayments may be, but the more you may pay in total interest on the loan. On the other hand, a short personal loan term can mean more expensive monthly repayments, but you'll likely pay less total interest on your loan. 

To make things easy, you might like to utilise RateCity’s personal loan calculator. By entering your preferred loan amount, loan term and interest rate, the personal loan calculator can estimate your potential weekly, fortnightly or monthly repayments, as well as interest payable and the total cost over the life of the loan.

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What to look for in a cheap personal loan

A low interest rate is one of the first features that many borrowers look for when seeking a cheap personal loan. A low rate can help minimise the cost of your repayments, so the total cost of the loan should be lower over the long run.

Other potential costs to look out include personal loan fees and charges, which may include:

  • Loan approval fee
  • Establishment fee or application fee
  • Annual fee
  • Administration fee
  • Late payment fee
  • Early Repayment Fee
  • Default fee
  • Service fee

It’s usually worth comparing the fees on some of the cheapest personal loans, as not every personal loan will charge all of these fees. For example, there are several loans that don't charge upfront fees, annual fees, monthly fees, or other ongoing fees. Some personal loans may charge no fees at all. 

Fixed and variable interest rates

The type of interest rate on your personal loan may also have an effect on its cost.

A fixed interest rate is set by your lender at the start of your personal loan term, and remains the same for the duration of your loan. This keeps your repayments the same for the entire term of your personal loan, and if these are cheap enough for you to easily afford, then organising your monthly budget should stay nice and simple. 

A variable interest rate, on the other hand, may be adjusted by your lender over the term of your personal loan, to better suit the current economic conditions. A rate cut could either lower your repayments, or allow you to pay off the loan faster, which can also make your loan cheaper in total as you’ll be charged less interest overall. However, interest rate rises could make your initially cheap personal loan repayments much more expensive, so be mindful of the risk of ending up in financial stress if your repayments were to rise.

Is it cheaper to pay off your personal loan early?

Does your cheap personal loan allow you to easily make extra repayments and get ahead on your loan? Adding your spare cash to your personal loan may help you to get it paid off as quickly as possible. By paying back your personal loan principal ahead of the scheduled term, you’ll likely be charged less total interest on your loan, for a cheaper deal overall. So far, so good.

But before you make moves to pay off your personal loan early, remember:

  1. Some lenders will charge fees for making extra loan repayments or making an early exit from your loan, to make up for the interest payments they'd be missing out on.
  2. These fees tend to be more common on fixed rate personal loans where you're expected to stick to a fixed repayment schedule, though they are sometimes present in variable rate loan deals too.
  3. Check your personal loan's terms and conditions, in case paying it off early ends up costing you more than you expected.

If you're concerned that putting your savings into your personal loan could leave you short of spare cash for emergencies, it may be worth considering a personal loan that offers a redraw facility.

When you get ahead on your personal loan repayments, the redraw facility will allow you to access the surplus funds, subject to your lender's terms and conditions. This may allow you to enjoy greater financial flexibility while bringing you closer to making an early exit from your personal loan.

Keep in mind that a personal loan offering flexible repayments and other features and benefits may charge a higher interest rate than a more basic 'no frills' personal loan. Be sure to compare personal loans before making your decision.

Secured or unsecured personal loans: what's cheaper?

In general, secured personal loans tend to have lower interest rates than unsecured personal loan, which means they are often a cheaper choice. If you already own a valuable asset, such as equity in property, you may be able to guarantee your personal loan against the value of your asset. This can help to lower the lender’s financial risk, which may help you to qualify for a lower interest rate and cheaper personal loan repayments. Many car loans are secured by the value of the vehicle being purchased.

If you don't have access to an asset with enough value to secure your personal loan, or if you'd rather not risk potentially losing your asset if you're unable to make your loan repayments, there is the option of an unsecured personal loan. As these loans tend to involve greater lender risk, they're more likely to have higher interest rates, resulting in more expensive repayments.

Are there 'no credit check' personal loans in Australia?

If you apply for a cheap personal loan with a major lender such as Commbank, you can expect to undergo a credit history check. If you have good credit or excellent credit, you may qualify for a lower interest rate that may help you save money on your personal loan. For those with a bad credit rating this can be a daunting experience, especially as having a loan application rejected can negatively impact your credit score.

It's still possible for people with bad credit to borrow money. Payday loans and peer-to-peer loans often don’t involve credit checks, and may allow bad credit borrowers to borrow smaller amounts of money.

However, these types of loans aren’t always cheap, as they often charge high fees. It may take just one missed repayment to find yourself up to your neck in huge penalty fees, putting you in financial trouble.

Can you use a cheap personal loan for debt consolidation?

If you're currently juggling repayments for multiple different debts, and struggling to manage their combined interest costs, taking out a low interest personal loan for debt consolidation could prove to be a cheaper option. You'd be making just one repayment per month instead of several, which may help to simplify your budget, and you’d be charged interest once and at one interest rate, instead of being charged interest at different rates on each of your outstanding debts.

However, not every personal loan can be used for debt consolidation, so remember to check with the lender first.

Compare cheap personal loans

The cheapest personal loan may not always be the best personal loan option for you, or the one that provides the greatest value. Before making a decision, it's worth comparing the personal loan offers from several different lenders at RateCity, and then work out whether you're comfortable with repayments using a personal loans calculator.

Once you find a personal loan that costs you less money, that provides features and benefits that suit your financial situation, and has eligibility criteria that you can fulfil, you'll be well on your way towards fulfilling those personal goals of yours.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.