Your Complete Guide To Personal Loans

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.

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: 


Secured Loans

A secured loan is a personal loan that requires you to provide security on the loan amount. In this case, the person taking out the loan uses an asset they own as security, usually your home or car, or in some cases the asset you are purchasing with the loan. The lender then has the authority to repossess your assets in the event of missed payment to cover the cost of your debt. These loan types are more likely to have lower interest rates as they are less financially risky for lenders. 


Unsecured Loans

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. 


Variable Loans

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.  


Fixed Loans

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.

However, as highlighted by SocietyOne CEO Mark Jones "A fixed rate loan is a good option in terms of stability, you will find it easier to budget as you know exactly how much you are paying for your loan each month."


Overdraft

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 three primary points of difference between these two personal loan types which are:

Asset Requirement

The main point of difference between secured and unsecured loans is the security you provide against your agreed loan. Secured loans are backed by an asset you own, such as your home or car, while unsecured loans require no security to set up.


Variances in Interest Rate

Since a secured personal loan carries less risk to lenders due to the borrower’s asset being used as security, they are generally offered with lower interest rates when compared to unsecured personal loans. While this makes a secured loan attractive to those who have a vehicle or house that can be used as the security, the unsecured variant has the advantages of being accessible to those who may not own high-value assets but still have good financial standing, such as young adults.


Restrictions on Loan Usage

While an unsecured loan will typically allow you to use the funds for whatever purpose you choose, a secured loan may have tighter spending restrictions applied. A common example is that of a secured personal loan taken out to purchase a car. In this instance, the lender may require the borrower to use the total loan amount to pay for the cost of the vehicle.



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Interest & Comparison Rates Explained

There are two main types of personal loan interest rates; fixed and variable. Fixed personal loans offer a fixed interest rate that does not change month to month, while interest rates on a variable personal loan are subject to change. 


Fixed loans will give you the stability of knowing what your repayment amount is each month, which is good if you’re looking to better manage your budgeting and repayments. However, some fixed loans do not allow you to make extra repayments on your loan amount or can charge additional fees that outweigh any benefits of paying early. Variable loans do allow you to make extra repayments which can mean you pay back your loan before the agreed term, however the monthly repayments can vary each month.



Benefits & Drawbacks of Personal Loans

There are a number of benefits and drawbacks 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 table below for some general personal loans pros and cons.


Advantages

Disadvantages

Consolidate existing debt
Transferring of debt rather than just paying off what you owe
Purchase big-ticket items now and pay off the full amount in smaller instalments
Not meeting the monthly repayments will increase fees and interest
Quick and easy to set up
Not meeting the monthly repayments will increase fees and interest
You can borrow any amount up to $100,000
Longer repayment period

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.



If you’re applying for a car loan you will also need to provide:

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.


Tips for getting your Application Approved

"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." Jones explains.


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Other questions you may have

Got a question about your personal loan application? Discover some personal loan FAQs below and get your money questions answered.
How soon after I apply will I receive my loan?

This is dependent on the type of loan you apply for, and the lender. Some banks offer existing customers same-day personal loans, and payday lenders can have your loan in your account within hours of approval. SocietyOne personal loans will typically be transferred to an approved applicants bank account within 24 hours.

What is the average interest rate on a personal loan?

The average interest rate for your loan will depend on the type of loan you apply for. Unsecured loan interest rates can average between 12-14% p.a, and around 8-12% p.a for secured loans.

Does the lender need to know what it is for?

If you’re applying for a secured loan you will need to provide details of what the loan is for. This is especially true with car finance agreements. For unsecured loans, you just need to give your lender a general idea of your loan purpose. If you are taking out a debt consolidation loan you will need to provide details of your other loans and credit cards.  

Can I buy a car with a personal loan?

Yes, you can use a secured or unsecured loan to buy a car, although it is important to note that unsecured loans usually offer higher interest rates. 

What is the best way to pay for a personal loan?

Now that your application has been approved and you’ve received your funds, you just need to keep on top of your repayments. You can pay for your loan with a direct debit, which is usually set up for you when you apply through your current bank. You can also set up an automatic transfer to pay off your loan. For additional payments, it’s best to use internet transfers, BPAY or deposit the money over the counter at the bank. If you miss a payment don’t bury your head in the sand! Contact your lender to set up a payment plan.

Why has the interest rate on my personal loan increased/decreased?

This can happen with a variable rate personal loan, where your monthly repayments are decided by overall interest rates. This is judged by what the Reserve Bank of Australia dictates the official cash rate is. 

What's the difference between payday loans and personal loans?

The main points of difference between payday loans and personal loans are the interest rate and timeframe for repayment. Payday loans generally have higher interest rates and operate within a shorter period of time, compared to a personal loan.