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How do personal loans work?
In a personal loan, you borrow a sum of money to pay for a personal expense, then pay back this loan plus interest over time in a series of scheduled repayments.
Do personal loans work like home loans?
Personal loans work similarly to mortgages, in that they require the borrower to commit to making regular repayments over the loan term, and make steady progress towards paying back their debt plus interest.
However, personal loans tend to have shorter loan terms than home loans. Paying for your home or investment property often takes decades (25 to 30 years or more is common), while many personal loans are repaid much sooner. Some personal loans can run for a few years (often between one and five years), while others have terms of less than 12 months.
Do personal loans work like credit cards?
Most personal loans don’t work like credit cards. Here’s why:
If you have a personal loan…
- You borrow a set amount of money, which you receive in one lump sum at the start of the loan, and can’t borrow more later on.
- You are required to make regular repayments to make progress towards clearing your debt plus interest over time.
- You are charged interest on what you owe when you make each repayment.
- You can’t borrow more money later on as part of the same personal loan.
If you have a credit card...
- You can borrow any amount of money, up to your credit limit, at any time.
- You’re required to make regular minimum repayments (often very small ones), but aren’t required to completely clear your debt.
- Most credit cards have a number of interest-free days for new purchases – if you clear your balance before these days expire each repayment cycle (often monthly), you aren’t charged interest on what you owe.
How do Line of Credit Personal Loans work?
While many personal loans let you borrow money in one lump sum, some personal loans offer a flexible line of credit, which functions much like a credit card with a higher than average credit limit.
Borrowers often apply for line of credit personal loans if they require flexible access to finance to manage multiple smaller expenses over time, rather than one large lump sum.
While you’ll only be charged interest on what you borrow, rather than the full lump sum, there may be fees and charges involved, and much like a credit card, you may be tempted to spend more than you can easily afford to repay.
How do secured and unsecured personal loans work?
Secured personal loans are guaranteed by the value of an asset, such as a car or equity in a property. If you’re unable to pay back your loan and default on your repayments, your lender will be able to repossess and sell your asset to help cover their losses. Because this makes lending money less risky for the lender, secured personal loans often have lower interest rates.
Unsecured personal loans don’t require security, making them a potential option for borrowers unable or unwilling to provide an asset as collateral. However, they often have higher interest rates on average.
Do car loans work like personal loans?
Most car loans are a type of personal loan, structured specifically for vehicle finance.
It’s common for a car loan to be a secured personal loan, using the value of the vehicle you’re purchasing to guarantee the loan, which can help you enjoy a lower interest rate. Because secured loans often require the vehicle to retain enough value to cover the loan, they may be restricted to particular vehicle models, or vehicles under a certain age.
If you’re buying a car that doesn’t suit a secured car loan, there are also unsecured car loan, which offer greater flexibility but often have higher interest rates.
How do personal loan features work?
- Advertised rate – The interest you’ll pay on your loan
- Comparison rate – An indication of the loan’s total cost, including the interest and the standard fees and charges.
- Fixed rate – An interest rate that remains the same for the loan’s full term. Keeps repayments the same, for simpler budgeting.
- Variable rate – An interest rate that the lender may increase or decrease during your loan term. You may save money if the interest rate falls and your repayments decrease, though your loan may cost you more if the interest rate rises and your repayments increase.
- Redraw facility – If you make extra repayments onto your personal loan, you can redraw these from your loan if you need some of that money back again.
- Fully drawn advance – A loan where you receive he full lump sum at the start of the loan term.
- Early exit penalty fee – A fee that some lenders require the borrower to pay if they make enough extra repayments onto their loan to clear their debt ahead of schedule.
How does applying for a personal loan work?
- Compare personal loans based on your personal finances: Make sure you’re confident you can afford to repay a personal loan before you apply, and that its feature and benefits are suitable for your households’ needs.
- Check your eligibility: Most personal loans require you to be an Australian resident who’s over 18, has a steady income, and a good credit score. Some loans and lenders have more or less requirements – check before you apply.
- Collect your documents: You’ll usually need to provide ID and enough documentation to prove you fulfil the loan’s eligibility criteria.
- Apply, either online or by completing a paper application form: Your lender may take less than an hour to assess and approve your loan, or it may take a few business days, depending on your lender.
- Get your money: You may receive your funds on the same day of your loan’s approval, or it may take a few business days.
- Start making repayments: You may be able to pay monthly, fortnightly or weekly, which may better suit your income. Also, making extra repayments may help you clear the loan faster and pay less interest.
How do debt consolidation loans work?
If you have outstanding personal loans and/or unpaid credit cards, and are struggling to keep up with your payments, one option could be to apply for a debt consolidation loan. These personal loans let you borrow enough money to clear your other outstanding debts, effectively exchanging multiple smaller debts for a single combined debt. This means you’ll have just one loan repayment to manage, and you’ll only be charged interest on one loan, and at one rate.
Debt consolidation personal loans may not be suitable for every financial situation. Consider contacting a financial adviser before applying. The national debt helpline is another resource available to borrowers struggling with outstanding debts.
Senior Financial Writer
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.
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Frequently asked questions
Can you refinance a $5000 personal loan?
Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.
If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.
What is the average interest rate on personal loans for single parents?
Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.
How much can you borrow with a bad credit personal loan?
Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.
What is a bad credit personal loan?
A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.
Should I get a fixed or variable personal loan?
Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.
A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.
Do student personal loans require security?
While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.
Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.
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.
Can I get a no credit check personal loan?
Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.
What do single parents need for a personal loan application?
Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:
- Proof of identity
- Proof of residence
- Proof of income
- Details of assets (e.g. car, home)
- Details of liabilities (e.g. credit cards, other loans)
- Loan amount
- Loan term
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.
What is an unsecured bad credit personal loan?
A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.
Are there low doc personal loans?
Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.
It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.
Can I repay a $3000 personal loan early?
If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.
Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.
Can unemployed single parents get personal loans?
It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.
If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.
Are there alternatives to $2000 loans?
If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.
Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.
Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.
What are the pros and cons of bad credit personal loans?
In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.
However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.
How can I get a $3000 loan approved?
Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.
Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.
How do I consolidate my debt if I have bad credit?
The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.
However, people with bad credit histories can make debt consolidation work by following this three-step process:
- First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
- Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
- Third, instead of spending those savings, use them to pay off the new loan.
What interest rates are charged for personal loans?
Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.
For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.
For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.
Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.
Can I get an easy/instant personal loan?
Some lenders are able to approve applications with little documentation and within minutes. However, there is a catch. People who take out easy/instant loans generally pay higher interest rates and are restricted to lower amounts than people who follow a traditional borrowing process.