How to apply for a personal loan

A personal loan can provide a cash boost when one of life’s expenses arises.  Whether you wish to fund a major purchase like a car or a wedding, or even consolidate your existing debts, you may be considering one. So how do you apply, and what happens if you’re unsuccessful?

If you’re considering applying for a personal loan, then the process may involve three particular steps:

1. Researching the various loan products available on the market.
2. Gathering the necessary documentation you’ll need to apply.
3. Submitting your application for the loan product.

In this article, we’ll consider each of these steps, as well as some additional questions you may have about how to apply for a personal loan.

How do you research personal loans?

If you are considering applying for a personal loan, your first step might be to research what providers on the market are offering personal loans, and what might be suitable for your particular needs. Generally, when considering personal loans, it is important to keep in mind things such as the interest rate, fees and charges, the comparison rate, the loan term and any flexibility the loan product may have around additional repayments, as well as any additional features the loan product may have, and the eligibility criteria.

• The interest rate: Interest on a loan is the amount that you’ll repay on top of the amount you have borrowed, which is known as the principal. It can vary based on a number of factors, such as whether the loan is secured or unsecured and your credit score.
• Fees and charges: Some loans come with establishment or ongoing fees, and some have fees for missed or even early payments, so it is important to get a sense of how much you’ll be charged.
• The comparison rate: This is a figure that estimates the total cost of the loan per year, taking into account both the interest rate and most fees and charges, and allowing you to get a better picture of your potential costs.
• The loan term: The term of a loan refers to how long you’ll have to pay it back. A loan with a five-year term may have lower repayments than a loan with a one-year term, but you may end up paying more in interest and fees over the life of the loan.
• Flexibility around additional repayments: Some lenders may charge a fee if you make additional repayments to pay off a loan more rapidly, but others don’t, so it is important to keep this in mind if you want to make additional repayments without a penalty.
• Features: Speaking of extra repayments, some loans come with helpful features, such as a redraw facility which enables you to withdraw funds if you are ahead on your repayments and need the cash for another purpose.
• Eligibility criteria: It is worth checking the eligibility criteria of any loan product to get an idea of how likely you are to be approved. For example, some loans may look appealing but may require an ‘excellent’ credit score.

If you know the amount that you wish to apply for, then you can compare personal loans with Canstar to get a sense of what’s on the market. You can also see which personal loans won Awards in Canstar’s Star Ratings.

What documents do you need to apply for a personal loan?

When applying for a personal loan, there are certain documents you’ll need to provide, in order to prove your identity and demonstrate to your lender that you are employed and have a regular income. It can be a good idea to gather these documents before you begin the application process. In general terms, you are likely to need:

• ID documents such as a drivers licence or passport to prove that you are aged over 18 and an Australian resident.
• Proof of income, typically in the form of pay-as-you-go (PAYG) payslips from your employer, to show that you earn a regular income that is above your lender’s minimum requirements.
• Proof of savings, typically in the form of bank statements, to give the lender a picture of how you manage your finances.
• Your employment details for the past three years.
• A list of any assets you own, including assets such as vehicles and property.
• A list of any debts you may have, such as other personal loans or home loans, credit card debts, outstanding buy now pay later (BNPL) balances and the like.
• A list of your general living expenses, including groceries, utilities, streaming services, rent, medical and transport costs, school fees and so on.

You may not need to provide all of this information, but it is a good idea to have it ready, depending on how strict your lender’s requirements are.

How do you apply for a personal loan?

Most major lenders and financial institutions will allow you to apply for a loan either in person, over the phone or online. If you are already a customer with a bank or financial institution, then you may not need to provide the proof of identity documentation listed above. Typically you can expect to hear back from a lender a few days after you apply, and they may have additional questions to ask for further supporting documentation.

Once your loan application is approved, you will be sent documents by your lender to sign and return, either electronically or by mail. Typically, if you have been approved for a loan, the funds will be accessible to you a short time after the application is processed.

Can you make multiple loan applications at the same time?

It is worth keeping in mind that making multiple loan applications to different lenders within a short space of time can negatively affect your credit score. For this reason, it may be advisable to carefully consider your options, weigh up lenders based on factors such as the price and features of their loans and your eligibility, and apply for the one loan you feel is most suitable for you.

What happens if you are rejected for a personal loan?

If your loan application is rejected, then it is important to understand why a lender might have rejected you before applying for another. Lenders in Australia are bound by responsible lending laws, and it is a condition of their licence that they do not give credit if they believe a borrower cannot pay it back.

According to Moneysmart, a lender may deny your loan application if there are defaults (i.e., overdue payments or payments for which the debt collection process has started) on your credit report, if you currently have payments that are more than 14 days overdue, or if your income or savings history indicates that you might struggle to pay the loan back.

What if you don’t meet the lender’s eligibility criteria?

If you are employed but feel you may not meet the lender’s eligibility criteria, then applying for a loan with a guarantor – a trusted person who can vouch for you and be responsible for the debt if you are unable to meet your required repayments  – can be an option that could strengthen your chances of approval.

If you are self-employed or a freelancer, you may not be able to provide regular payslips to show a lender proof of your income. In this situation, you may be able to apply for a ‘low doc’ or low documentation personal loan. These are loans designed specifically for people who wish to borrow money but may not have the necessary paperwork for a traditional loan application.

Can you apply for a personal loan with bad credit?

Bad credit personal loans are loans aimed at people with a low credit score. They are typically offered by non-bank lenders, and the application process may be a little stricter than for other kinds of loan – for example, lenders may make enquiries about your personal circumstances and the reasons behind any black marks on your credit score, such as bankruptcies.

If you plan to apply for a personal loan and you have a bad credit score, it is important to keep in mind that the interest rate you pay may be higher than the rate offered to a lender with a better credit score. CreditSavvy explains that this is because many personal loan lenders use ‘risk-based pricing’, meaning the riskier they perceive a borrower, the higher the rate they charge.

What are some other borrowing options if you have bad credit?

It is also important to keep in mind that if you have a bad credit score, there are other borrowing options besides taking out a personal loan. If you have a bad credit score, you may also have unmanageable debt, and this can lead to serious financial problems.

If you’d like some free and confidential financial advice, you can call the National Debt Helpline (NDH) on 1800 007 007 and speak to a financial counsellor. As well as running the helpline, the NDH helps consumers find individual counsellors and organisations in their local area. It can also give you information and resources on what your rights are if you are experiencing financial hardship.

If you are experiencing financial difficulty or if you are receiving centrelink payments, then you may be able to access options such as the Pension Loans Scheme or No Interest Loan Scheme (NILS) if you meet eligibility requirements. If you are considering a short-term personal loan, or payday loan, keep in mind there are many risks and potentially very high costs. There may be alternative options that are more suitable for your needs. Moneysmart says you could consider a NILS loan or a Centrelink advance payment, if you are eligible and need to get money fast.

How can you improve your credit score?

If your application for a personal loan is rejected because of a low credit score, or if you want to be in better financial shape before you apply, there are a number of steps you can take to improve your credit score:

1. Pay your existing loans and debts on time.
2. Pay your bills on time.
3. Think carefully before applying for any new credit.
4. Contact your credit provider or a financial counsellor if you need help.
5. Check your credit report for any inaccuracies.
6. Hold on to credit cards you can manage.
7. Lower the limit on any credit cards you have.

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