Applying for Personal Loans
Types of personal loans
Personal loans differ from other types of credit mainly home loans and credit cards by their characteristics.
Loan Periods
Typically the term of the loan ranges from one to up to seven years and have an interest rate usually much higher than a home loan but usually lower than a typical credit card.
Interest Rates
They most often have a set repayment amount although the interest rate is usually fixed it can be variable depending upon the credit provider.
Secured and Unsecured Personal Loans
Personal loans can also be split into two groups; secured and unsecured. Secured means that the loan provider takes ultimate control over an asset until the loan is paid out. Usually the item subject to control by the loan provider is the asset purchased with the loan. This is quite often the case with car or equipment loans. The benefit of this type of loan is that because in the event of a default the loan provider can recover their costs from the secured asset the interest rate can be significantly cheaper.
Interest Comparison Rate
The interest comparison rate takes into account the establishment, monthly and any other fees that are charged by the lender. It is mandated by ASIC to ensure that consumers are able to compare loans between providers. It prevents one lender claiming a better interest rate when if the actual fees were taken into account the higher interest loan provided by a competitor would actually cost less. A large differential between the interest rate charged and the comparison rate means that there are significant other fees involved and you should understand what they are before taking any action.
Fees
There are a number of fees that personal loans can attract. These will usually fall under the following categories.
Establishment Fee
Most loan providers will charge you an establishment fee and an ongoing monthly fee.
The establishment fee is often funded by adding this amount to the amount borrowed.
Ongoing Fees
Ongoing fees are normally paid on a monthly basis.
Exit Fees
If no fees are charged then the interest rate might be a little bit higher than a comparable loan from another provider.
Most loan providers will also charge fees to end the loan early. The names of this type of fee can be termination fee, break fee or exit fee. If you have extra funds available and are considering paying out your loan early check before doing so as it may be more beneficial to hold off and only pay the required amount.
Redraw Fees
There are also some personal loans that allow you to redraw funds that you have paid into the loan if you are ahead of the repayment schedule. There may be fees associated with redrawing any of these funds.
Repayments
Most personal loans require a repayment each month with most allowing you to repay weekly, fortnightly or on an ad hoc basis.
How much will the repayments be?
The easiest way to get an idea of what the repayments will be is to use a personal loan repayment calculator. Click here to use our Personal Loan Calculator.
Be aware that the actual repayment amount will be calculated by your loan provider and will depend on the interest rate, fees and term of your loan.
The shorter the loan period the less the amount of interest charged will be but the higher the repayment amount.
For example a loan of $10,000* will have the following repayments if taken over these loan periods.
| Loan Term | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 |
| Monthly Repayments | $903 | $485 | $347 | $278 | $238 | $211 | $193 |
| Total Interest Paid | $831 | $1,637 | $2,480 | $3,359 | $4,274 | $5,224 | $6,209 |
* Assumes interest of 15% pa and no establishment or monthly fees for ease of illustration.
The table above shows if you pay off the loan over 1 year the monthly repayment amount will be very high but the total interest cost will be very low. Conversely if you pay off the loan over 7 years the monthly repayments will be very low but the total interest cost will be very high.
Method of repayment
The most common method of repayment is by direct debit or BPay. If you have the loan with your bank or have access to internet banking facilities then you might be able to make payments whenever you want as long as the total paid per month is above the minimum required.
Applying - The Loan process
Telling them about yourself
The process of entering your personal and financial details online should not take more than 15 minutes to complete online. They will ask you questions about you, where do you and have you lived over the last 5 years or more and details about your employment history. You will need to provide details of your assets, liabilities , income and expenses. These facts help them ascertain whether you have the ability to repay the loan and whether you are a good credit risk.
Proof of details provided
The second step is to provide proof of your details by supplying various documents that can prove what you have said. Documents typically include personal identification items (ie photo id like a car license), rates notices, and employment wage pay slips or records and copies of transaction records of bank accounts and other loan accounts.
The lender may also contact your employer to confirm some details.
The actual items checked will vary according to each lenders own criteria.
Initial Assessment
If the details you have provided meet the lenders criteria then a initial or conditional approval can usually be made almost immediately and some lenders get immediate response from their computer analysis and can let you know within a minute or so if you are able to get a loan.
This initial or conditional approval will be finalised when they receive the proof documents required.
You will need to either send these documents to them via the mail or make an appointment to visit a branch of your lender.
Provision of Loan proceeds
The provision of the loan funds or disbursement can either be in the form of a cheque or direct deposit into a specified bank account. You should be able to nominate when you finalise the application process.
Checklist
Calculate if you can afford the loan amount by using a personal loan calculator.
Proof documents
Any document that can help prove the following:
- income and employer details payslips, bank statements
- home ownership rates notices
- other loan details loan statements
- address details rates notice, home phone statements
- personal details car license, credit cards
