What is a personal loan?

The lender approves an amount and a term, pays the money into your account, and you repay it in scheduled instalments, usually monthly. Most personal loans are principal and interest, so the balance falls with every repayment. Interest only versions exist, but the principal stays where it is and the repayments jump later.

An unsecured loan has nothing behind it, so approval rests on your credit history and income and the rate is typically higher. A secured personal loan is backed by an asset such as a car or savings, which can bring the rate down but adds the risk of repossession if you default.

Rates are fixed or variable. A fixed rate keeps the interest, and usually the repayment, steady for the term. A variable rate moves with market rates, so repayments can change during the loan. Some lenders package the loan with account features such as offset or redraw for a fee.

A joint loan puts two or more borrowers on the contract and shares the responsibility between them. A guarantor loan brings in a third party who becomes responsible for the repayments if you cannot make them, which helps when credit history or deposit is thin. Instant or small loans approve quickly but usually cost more in rates and fees.

Look past the advertised rate at the establishment fee, ongoing monthly or annual account fees, early repayment or exit fees, and default and late fees. A comparison rate assumes a particular loan amount and term, so compare like for like, then model the repayments against the actual fee schedule. Fees weigh most heavily on small loans.

Lenders check identity, residency, age, income and employment type, and they pull your credit report. Serviceability testing takes your income, subtracts living expenses and existing commitments such as rent, a mortgage, child support and other loans, and adds a buffer to the rate. Having payslips, bank statements, proof of address and tax returns ready shortens the process.