GuidesPersonal Loans Guide
Your Complete Guide To Personal Loans
Discover the ultimate guide to personal loans in Australia, compare loan types and see which option is best for you.
12 min read
Sometimes, you need a helping hand to get you to the next stage of your life. Whether you’re buying a new car, remortgaging your home or taking that first step on the property ladder, a personal loan can help you get there faster. But which loan is right for you? Is taking out a loan the right course of action? Discover our complete guide to personal loans in Australia, compare loan types and see which option is best for your needs today.
What is a personal loan?
A personal loan is a lump sum payment of between $2,000 to $100,000 that is repaid over a term of up to seven years. The loan amount and repayment options are then agreed upon by you and the lender. A personal loan can be secured or unsecured, and used for a variety of purposes, from buying a new car to buying your first home.
Key Factors to Consider before Applying
Before you take out a personal loan it’s important to consider your reasons for needing the loan. Perhaps you are making renovations to your current home, buying a new home or consolidating your debts to manage your monthly outgoings.
How much are you looking to borrow?
If you’re looking to borrow a smaller amount under $2,000 you might want to consider an overdraft or a short term loan rather than a personal loan.
Do you have a bad credit rating?
When applying for a loan your lender will perform a credit check on you before taking your application further. A bad credit score can mean high risk, which can mean higher interest on your loan, so if you know you have a bad credit score you may be better off looking at loans from short term lenders. Use our Repayment Calculator to get a better idea of your rate in seconds!
Do you have any equity you can use as security?
Secured loans offer lower interest rates, as they are lower risk. If you have assets you can use as security you can benefit from a lower rate overall with a secured loan.
Do you need one lump sum, or will you need more funds during the loan term?
If you need to access funds more than once over a longer period you may want to choose a personal line of credit or overdraft.
What Personal Loan Types are Available?
Choosing the right type of personal loan for you can save you a lot of money on interest repayments in the long run. There are a few standard types of personal loans you can choose from, including:
An unsecured personal loan is one where the lender requires no security on the debt. This means your loan is not backed by any personal collateral, such as home equity or a line of credit. Unsecured loan types offer a more flexible option for borrowers, however interest rates on these loan types are usually higher as they are more financially risky than a secured personal loan. You may also need to provide a guarantor to say that your repayments will be made, though this is not normally required.An unsecured personal loan is one where the lender requires no security on the debt. This means your loan is not backed by any personal collateral, such as home equity or a line of credit. Unsecured loan types offer a more flexible option for borrowers, however interest rates on these loan types are usually higher as they are more financially risky than a secured personal loan. You may also need to provide a guarantor to say that your repayments will be made, though this is not normally required.
Whether it be a wedding, car, home improvements or even a dream holiday, having a good credit score provides you with far more flexibility when it comes to making large purchases, especially if you lack the initial funds to pay for something in full.
A variable-rate personal loan is a flexible loan with varying monthly repayments. Interest rates can fluctuate at the lender’s discretion, which can cause your repayment amount to increase or decrease. If rates decrease, your repayment amount will decrease and vice versa. These loan types tend to be more likely to offer features and benefits which could suit your situation, however they can be harder to budget for on a month-to-month basis.
The opposite of variable loans, fixed loans charge a fixed interest rate for the full term of the loan, making it easier for you to manage your repayments. The only real downside to a fixed loan is if interest rates drop, you won’t see the benefit and may be paying more.
An overdraft is a type of emergency personal loan, where you are granted a specific amount of money to go “overdrawn” on your account balance. These are simple to set up and a convenient way to cover any financial emergencies or expected payments leaving your account. You only pay interest on what you use throughout the month, however, there are usually caps on how much you can borrow, and interest rates are usually higher than a personal loan.
Line of Credit
A line of credit a pre-agreed borrowing limit that can be used at any time, offering flexible access to funds as and when you need them. These kinds of loans work similarly to a credit card and are good for making multiple smaller purchases that can be repaid quickly.
Secured vs. Unsecured Loans
There are 3 primary points of difference between these two personal loan types:
|Asset Requirement||Backed by an asset you own, such as your home or car||Require no security to set up|
|Variances in Interest Rate||Lower interest rates||Higher interest rates|
|Restrictions on Loan Usage||Some restrictions||Little to no restrictions|
Use our loan calculator to get your free personalised rate
Benefits & Drawbacks of Personal Loans
There are a number of advantages and disadvantage to taking out a personal loan, most of which will be relevant to your personal situation. Take some time to consider your reasons for taking out the loan and assess how the loan will benefit you in the long term. Check out the information below for some general personal loans pros and cons.
Consolidate existing debt
Purchase big-ticket items now and pay off the full amount in smaller instalments
You can borrow any amount up to $100,000
Longer repayment period
Transferring of debt rather than just paying off what you owe
Not meeting the monthly repayments will increase fees and interest
Did you know?
Personal loans offered by SocietyOne are free of hidden fees or monthly costs and also don’t penalise you for being proactive by not charging early repayment fees.
What Documents are Needed to Apply for a Loan?
In order to apply for a loan, there are some personal documents you will need to share with your lender. Most financial institutions will have their own application criteria, but in general, you will need the following documentation to finalise your loan application.
Proof of identification
This can come in the form of a driver’s licence, proof of age card, passport or Medicare card. You may also be asked to provide a utility bill showing your current address.
Proof of income
In order to verify your income, you may need to provide recent payslips, proof of bank statements and two years of tax returns if you’re self-employed.
Statements from other loan accounts/credit cards
Your lender will ask you to provide information on any other loans or credit cards you have open before you set up your personal loan.
If you’re applying for a car loan you will also need to provide:
• VIN or chassis number, engine number and registration plate details
• Car dealer information or the contact details of who sold you the car
• Dealership invoice (if you are purchasing a vehicle)
• Your CTP insurance and comprehensive insurance details
Common Reasons for Personal Loan Application Rejections
Getting rejected for a personal loan can be disheartening, especially when you’re in a tight spot and in need of the money. You can feel lost, and unsure of why they would reject you. There are a variety of reasons your loan application may get rejected, ranging from your employment history to the reason you need a loan in the first place.
Read on to discover the most common reasons personal loan applications are rejected to get an idea of your own eligibility and tips for getting your application approved.
Bad credit history
There are a number of factors that can give you a bad credit score, even if you have never defaulted on a loan payment before. Things like late payments and applying for lots of different loans over a short period of time can give you a bad credit rating. Have an idea of your rating before you apply by requesting a copy of your credit report or getting a credit score check.
Your lender is going to be looking at your application and thinking, “Does this person have the means to make the monthly repayments on this loan?”. Lenders cannot approve applications that can’t be paid back, so this will play a huge factor in the decision-making process.
Unstable employment history or non-existent employment history
In relation to the above, lenders will check your employment history, and whether your job is stable enough to keep up with monthly repayments.
Incorrect personal details
Lenders are looking to verify your details in order to grant you the loan, so any inconsistencies here will be flagged and they might reject you.
Credibility of loan purpose
Check you can finance what you need with the loan you are making an application for. Many loans come with restrictions on how the funds can be used, for example, secured loans can only be used on certain assets.
Many lenders have restrictions on what assets you can use as equity against your loan, so if your assets don’t make the cut you could be rejected.
Amount of loans already open
If you already have several personal loans open the lender could reject you as high risk.
“A great idea is to check your credit score and make sure you meet all of our eligibility requirements before applying. That way you may avoid being rejected.” SocietyOne CEO Mark Jones
Tips for getting your application approved
Understand your eligibility
Make sure that you understand the requirements of the loan you are applying for.
Double-check your personal details
It seems simple, but ensure that the details you provide are correct so that there is no reason for your application to be rejected. Providing any incorrect information or submitting a part-filled out application can lead to rejection.
Check that your equity meets requirements
Ensure that your collateral meets the requirements of the loan you’re applying for.
Take a look at your loan portfolio
Don’t hold more loans than you can afford, as your lender might not think you’ll be able to pay it back. If you have other loans, you can look into consolidating this into one loan or paying back some of the loans before you apply for new ones.
Check the credit requirements
Understand what level of credit you will need for your loan application to be successful and see if you meet them. If you’re unsure, ask your lender before you apply.
Check your loan purpose is allowed
Discuss your loan purpose with your lender to see if it suits the loan you are applying for. Secured loans will have more restrictions.
Ensure you meet employment requirements
Check whether you need to have been in your job position for a certain amount of time, or how regularly you need to show income is coming in before you apply.
Find out the min. income requirements
Different lenders will have different income requirements, and this can change subject to the loan you are applying for.