What is a loan?

The lender advances the principal and you repay it in scheduled instalments that cover interest and part of the balance. Interest can be fixed, locked for a period so repayments are predictable, or variable, moving with market rates. Across the life of the loan the interest portion of each repayment falls and the principal portion grows, which is what an amortisation schedule sets out.

Features shape the deal as much as the price does. Redraw lets you pull back extra repayments you have made on some variable loans. An offset account is a transaction account linked to a home loan, where the balance offsets the loan and cuts the interest charged. Security matters too: a secured loan gives the lender an asset it can seize on default, which is why secured borrowing is generally cheaper than unsecured.

Personal loans cover consolidation, home improvements or a car, and are usually unsecured over a fixed term of a few years. A home loan is secured against property and runs for decades. A car loan is normally secured by the vehicle. Business loans fund working capital, equipment or expansion, can be secured or unsecured, and come with more documentation than consumer lending.

At the risky end sit payday and short-term loans, which give quick access to small amounts at a very high cost and belong in the last-resort category. Vehicle and equipment purchases can also be structured as a lease rather than a loan, which changes who owns the asset. Which one fits depends on what you are buying, how long you need it, and whether you want to own it.

Lenders assess ability and willingness to repay: credit history, serviceability (net income less living expenses and existing commitments), employment stability, declared living costs, and for secured lending the loan-to-value ratio. Expect to supply photo identification, payslips or tax returns if you are self-employed, and a few months of bank statements. Business lending adds financial statements and cashflow forecasts.

When comparing offers, look past the advertised rate. Ask for the comparison rate calculated on your amount and term, the full fee schedule (establishment, ongoing, valuation, discharge, early repayment) and an amortisation schedule. Check repayment flexibility: extra repayments, frequency, redraw and offset. On consumer loans, responsible lending obligations require lenders to assess your capacity to repay, and a lender or broker who will not hand over a credit guide, pre-contractual statement or clear fee schedule is a warning sign. Loans taken predominantly for business purposes sit outside the National Credit Code, so there is no mandated comparison rate and fees have to be priced up manually.