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What is a personal loan?

A personal loan is a financing option in which a borrower gains approval to borrow a certain amount of money as a lump sum from a lender for a specific, personal use. In Australia, this may include:

The borrower will then repay the loan amount over a set loan term (typically 1-7 years) and pay interest to the lender, as well as potential fees.

Why should you compare personal loans?

As no two personal loans or lenders are the same, it’s crucial that you compare your loan options to ensure you’re getting the best deal for your goals and financial situation.

Sticking with your childhood bank, for instance, may result in you being charged a higher interest rate and/or fees than if you took the time to compare a range of options across the personal loan market.

For example, you may find that your existing bank offers an unsecured personal loan with interest rates between 10-17%, but a competitor lender offers the same types of personal loans between 6-15%. 

It may not seem like much, but on a $30,000 fixed rate loan over five years, the difference between making ongoing repayments at 6% and at 10% may amount to saving $3,446 in interest charges. 

How do you compare personal loans?

There’s more to a personal loan than the interest rate charged. To help you find and choose your best personal loan option, it’s worth comparing a range of loan factors.

Personal loan factorAbout
Interest rateThe amount of interest charged on the loan amount – a significant factor to the overall cost of the loan.
Comparison rateA loan rate that factors in the advertised rate and many of the loan fees to help provide a more ‘accurate’ true cost of the loan, based on a $30,000 loan over 5 years.
FeesA lender may charge a range of fees, including upfront fees, like application fees and establishment fees, as well as ongoing fees, like service fees or monthly fees. Keep in mind that a loan with a low interest rate but high fees may be more expensive over the life of the loan than one with a higher interest rate and lower fees.
Loan termThe length of time you repay the personal loan. A shorter term loan (1-3 years) may mean higher monthly repayments but less interest charged compared to a longer term loan (4-7 years), which may offer lower ongoing repayments but will see more interest charged comparatively.
Interest rate typeYour interest rate may be fixed, meaning the rate will not fluctuate over the loan term, or variable, meaning it is subject to market fluctuation and may rise or fall over the loan term.
Secured or unsecuredYou may choose between securing the personal loan with an asset as collateral or opting for an unsecured loan. A secured personal loan will typically come with a lower interest rate as there is less risk of default if your asset may be seized as a result.
FeaturesSome personal loans come with helpful features, such as a redraw facility or the ability to make additional repayments without being charged an extra repayment fee.

How do you find the best personal loan?

How do you find the best personal loan?

There are several comparison tools available from RateCity that may be able to help you find your best personal loan option, including:

Comparison tables

A personal loan comparison table is a tool that allows you to narrow down your loan options and view them side by side. First you need to enter in your loan details, such as the amount you want to borrow and the loan term. Then you may filter down your results with options like whether the personal loan offers the ability to make extra repayments, or is offered by online lenders only.

Personal Loan Calculator

RateCity’s Personal Loan Repayment Calculator can show you an estimate of how much your personal loan repayments may cost, based on the amount you’d like to borrow, your preferred loan term and interest rate. The repayment calculator may show you an estimate of the total interest payable and total amount payable based on weekly, fortnightly, or monthly repayments.

Real Time Ratings

Real Time Ratings is RateCity’s world-first rating system that ranks personal loans of five stars, based on loan costs and flexibility. Unlike other rating systems that grade their products once or twice a year, Real Time RatingsTM results are calculated as you use the site, making them as up to date as possible.

Calculate your personal loan repayments

Compare and save using our Personal Loan Calculator

Calculate what your repayments could be on your personal loan.

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Do you need a good credit score for a personal loan?

Your credit history (among other factors) plays an important role in determining not only whether you’ll be approved for a personal loan, but the interest rate you may be offered.

Providers have strict loan application eligibility criteria that you will need to meet to gain loan approval and having a good to excellent credit rating is a common requirement. The provider will perform a hard credit check on you when you apply.

Borrowers with a higher credit score are typically offered lower interest rates, as having a high credit score demonstrates a level of financial responsibility to the lender, indicating the borrower is less likely to default. But if you have bad credit this does not mean you cannot get a personal loan, and it may be worth exploring your options further.

So, if you’ve ever wondered why personal loan rates vary, it often comes down to the lenders’ criteria and how you may fit into it. Unlike home loan interest rates, personal loan interest rates are generally offered in a range, and Australian lenders may reserve the lowest rates in these ranges for borrowers with excellent credit scores.

Before you apply for a personal loan, it may be worth looking over your credit report with a fine-tooth comb to ensure your score is where it should be.

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