Everything You Need to Know About Personal Loans

When it comes to borrowing money, not all loans are created equal. Here's your cheat sheet to make sure you're getting the best deal.

There are almost as many reasons for taking out a personal loan as there are lenders willing to give you the money. Actually, scratch that, there are heaps more reasons to take one out. From weddings to holidays, home improvements, debt consolidation, to a new set of wheels - hey, if you want to buy an elephant and a year’s worth of whatever elephant food is - there’s a loan out there for you somewhere. Probably. At least you’d have some weighty security to offer!

In fact, some $146 billion in personal loans were issued in the months up to August 2019, according to Reserve Bank data, down some $4.8 billion on the previous year, but still a hugely significant amount of cash.

But while many Australians continue to embrace the idea of a personal loan, it’s also very true that not all loans are created equal, with banks, independent lenders and smaller outfits offering vastly different terms and rates, all of which can add up to a very good, or very bad, deal for you.

While we can't help you spend it wisely (but perhaps rethink the elephant thing), we can at least help you borrow smarter. So here’s everything you need to know about personal loans.

Your interest is (almost) everything

The first and most obvious difference you’ll be looking for in any personal loan is the interest rate, and many factors will determine what that rate is.

Some of those factors include whether the loan is secured or unsecured, how much you are borrowing, and sometimes what time frame you take the loan over.

Your interest rate is an important number, because it helps determine exactly how much you’ll be paying back and over how long. The difference between borrowing $5000 over five years at 13.99%, compared to say 15.99%, may not seem like a huge difference when you’re keen to get the loan underway. But over time it will mean your repayments are higher EVERY month for the five year period - and that can add up to a fair amount of extra money over the course of the loan.

How long is too long?

When it comes to the term of a personal loan, the general rule of thumb is the shorter the better, provided, of course, that you can easily afford to make the monthly repayments.

Borrowing $5000 over three years rather than five years will mean that your monthly repayments are greater, but of course there are 24 less of them to pay! So although it’s a bigger short term outgoing, you’ll pay less over the course of the loan.

Check the emergency exits

Just because you take a loan over three (or five, or seven) years, it shouldn’t mean you're locked into paying the minimum payment (and thus the maximum interest) for the life of the loan. The best loans will give you options to repay the loan principal faster, and thus minimise the amount of interest you pay. You never know when money will suddenly appear in your life, so it's nice to know you can make extra repayments whenever you can.

Calculate everything

It seems so obvious, but a loan is more than just principal and interest, and so to get a crystal clear idea of just how much you’ll be asked to repay, you need to run the numbers in full. Depending on where you’re borrowing the money from, that will include things like an establishment fee, monthly maintenance charges, potential late-payment penalties and processing costs. And yes, these can add up to hundreds of dollars in total, so it pays to shop around.

Polish your financial resume

The Government’s Money Smart website refers to how Lenders look at your credit score or credit rating, to work out if they should lend you money or give you credit. It means that your history of paying off your credit card, paying your bills on time and giving your finances a thorough health check every now and again, will directly determine how much interest you’re charged on your loans - which is a very big deal. Your credit score (which is free to check, by the way) will also impact how much you can borrow, if any at all. So it’s something you really want to be across.