Types of personal loans
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About personal loans
What is a personal loan?
A personal loan is an amount of money you can borrow for a specific purpose. For example, personal loans are often taken out from financial institutions to help pay for big expenses like a wedding, home renovations, debt consolidation, holidays or buying a car.
The loan amount, plus any interest and fees, must be paid back within a certain timeframe (known as the loan term). This typically ranges from one to seven years.
What are the different types of personal loans?
Fixed or variable rate loans
Personal loans can come with a fixed or variable interest rate. With a fixed interest rate, the interest rate will stay the same during the loan term. With a variable interest rate, it can go up or down.
Secured or unsecured loans
Personal loans can also be either secured or unsecured. A secured personal loan requires you to provide an asset to be used as security for the loan, also known as ‘collateral’. For example, car loans are often secured by the car being purchased. We compare car loans separately on our website. If you don’t repay the loan on time, the lender can repossess the asset and sell it to recover the loan amount.
An unsecured personal loan does not require an asset to be provided as security. Interest rates are typically higher on unsecured loans, as the provider does not have that added financial security. If you don’t make your repayments, the lender may take you to court to recover the money you borrowed.
How to compare personal loans
It’s important to compare your options to make sure you are getting the right personal loan for you and you aren’t paying more than you need to in interest or fees. Some factors to consider include:
- Interest rate – this can vary depending on the provider, whether the loan is secured or unsecured, and your personal circumstances (such as your credit score and whether you have a loan guarantor).
- Comparison rate – this takes into account the interest rate and most upfront and ongoing fees and is designed to give you a better idea of the total cost of the loan per year.
- Fees and charges – such as an application fee, monthly fee, missed payment fees and early payment fees.
- Loan term – a loan with a longer term may have lower repayments, but it also means you will pay more interest over the life of the loan.
- Flexibility around additional repayments – most lenders on Canstar’s database allow you to make extra and lump sum repayments. However, it’s important to check whether any additional fees apply.
If you are comparing personal loans, Canstar’s comparison tables could be a good place to start. Canstar assesses and ranks personal loans each year as part of our Personal and Car Loan Star Ratings.
How does Canstar compare personal loans?
Canstar compares personal loans using a unique and sophisticated Personal and Car Loans Star Ratings methodology, which looks at both price and features. The ratings represent a shortlist of products, enabling customers to narrow down their search to products that have been assessed and ranked. The top-performing products receive a 5-Star Rating.
Some of the factors Canstar considers for personal loans are:
- total cost including the interest rate, upfront fees and ongoing fees
- loan purpose
- security requirements
- repayment requirements and options
- redraw, top up, offset and switching facilities
- online self service for the loan
Personal loan rates in October 2021
Interest rates on personal loans can go up and down regularly due to a number of factors, not least lenders sharpening the rates they offer to new customers. If you’re currently in the market for a personal loan, you may be interested in understanding whether the products you’re considering are competitive, relative to some of the other personal loans out there. Below we show the average and lowest interest rates and application fees for unsecured personal loans on Canstar’s database, as at 6 October, 2021.
Average unsecured personal loan rate: 10.74%
Lowest unsecured personal loan rate: 3.99% (comparison rate 7.54%)
The average application fee on unsecured personal loans is $169, while the lowest is $0.
Source: www.canstar.com.au. Based on unsecured personal loans on Canstar’s database for a loan amount of $30,000 and loan term of five years. Includes variable and fixed rate loans. Excludes loans limited to the purchase of environmentally-friendly products. Average rate based on the mid-rate for loans that supply a rate range.
Looking for the cheapest or lowest personal loan rates?
When comparing products, how do you find the cheapest personal loans out there? It’s worth bearing in mind that the provider with the cheapest personal loans isn’t necessarily the one offering the lowest interest rates. Because personal loans involve smaller amounts repaid over a shorter time period than a home loan, fees can have a larger impact on the overall cost. For example, a product with a low interest rate but which charges upfront and monthly fees may end up being more expensive than a loan with a slightly higher interest rate and no fees.
Loan features can also boost the value you’re getting overall. So, the cheapest personal loans on offer for your situation may ultimately be the ones offering the best combinations of interest rate, fees and features that allow you to repay the loan early without penalty.
Looking for the best personal loan?
So how can you find the best personal loan for you? When choosing a personal loan, it’s important to shop around and compare your options. Consider factors such as the price (including the interest rate and fees) and features (such as if you can make additional repayments and pay off the loan early without penalty).
To help consumers narrow down their options, Canstar researches and rates hundreds of products as part of its annual Personal and Car Loan Star Ratings.
Personal Loans FAQs
Please note that these are a general explanation of the meaning of terms used in relation to personal loans.
The wording of loan terms and conditions may use different phrases or terms, and you should read the terms and conditions of the relevant loan to understand the features and cost of that loan. You cannot rely on these terms to be part of any loan you may take out.
Refer to the lender’s product disclosure statement (PDS), and see Canstar’s Financial Services and Credit Guide (FSCG).
How much can I borrow with a personal loan?
This will depend on the provider (they typically specify minimum and maximum loan amounts) and your financial situation. When working out how much you can borrow, the provider will consider your personal details (including whether you have dependents and if you are making a single or joint application), your income, your expenses and any other financial commitments you have (such as credit cards).
How can I apply for a personal loan?
If you would like to take out a personal loan, you can compare some of the major providers with Canstar.
Before applying for a personal loan, check to see if you meet the lender’s criteria. For example, some lenders may have minimum income requirements and specify that you need to have a good credit score.
When you apply for a personal loan, you may need to provide personal information, such as details about your income and expenses.
What is an account-keeping fee or ongoing fee?
An account-keeping fee or ongoing fee is a monthly fee that is charged by a lender to help cover the administration cost of maintaining a line of credit. Alternatively, you may be charged an annual fee rather than an ongoing account-keeping fee.
What is an advertised rate?
An advertised rate is the interest rate advertised by institutions, not including fees, discounts and special offers. It shows how much interest you will be charged per year on the balance of your loan.
What is a comparison rate?
A comparison rate is an interest rate designed to represent the total annual cost of the loan, including the interest rate and most ongoing and upfront fees and charges. On the Canstar website, all comparison rates for personal loans are based on credit of $10,000 and a term of three years, unsecured, unless otherwise stated.
What is a credit score or credit rating?
A credit score or credit rating is a number that represents the creditworthiness of an individual borrower, based on their borrowing and repayment history (as shown on their credit report). Find out how to check your credit score. Lenders consider your credit score when deciding whether or not to give you a loan, how much to lend you, and what interest rate you will pay.
What is a debt consolidation loan?
A debt consolidation loan is when you take out one personal loan to pay off multiple other debts, such as other loans or credit cards. This is often done to secure a lower interest rate or for the convenience of paying only one monthly repayment, instead of multiple repayments.
What does it mean to default?
Defaulting is when you do not make your loan repayments on time and in full. A lender can list a default on your credit report if the payment is more than $150, over 60 days late and the lender has taken certain steps to collect the debt. Defaults stay on your credit report for five years and can have a negative impact on your credit score.
What is a fixed interest rate?
A fixed interest rate is an interest rate that remains the same for the duration of the loan.
What is a variable interest rate?
A variable interest rate is an interest rate that may change over time.This means your repayments may vary.
What is a loan term?
A loan term is the length of time a borrower has to repay a loan. Personal loans usually have a loan term of between one to seven years.
What is a redraw?
A redraw is a loan feature that allows a borrower to withdraw additional repayments they’ve made on top of required minimum repayments. A redraw feature is not available on all loans.
What is a secured loan?
A secured loan is a loan that is backed by an asset, such as a car, which is used as security or collateral for a loan. If you don’t repay the loan on time, the lender may repossess the asset and sell it to recover money owed.
What is an unsecured loan?
An unsecured loan is a loan that is obtained without security. Unsecured loans typically have a higher interest rate. If you don’t repay the loan on time, the lender may take you to court to recover money that is owed.
What is a small personal loan?
A small amount loan, fast loan or payday loan, is a loan of up to $2,000 that you have between 16 days to one year to pay back.
Lenders can’t charge interest on small amount loans, but they can charge high fees. According to ASIC, most lenders charge an establishment fee of 20% of the loan amount and a monthly service fee of 4% of the loan amount.
Payday loans are typically more expensive than other types of loans, so it’s important to carefully consider the costs involved and make sure you will be able to afford the repayments.
→ Related: Payday loans vs personal loans
Personal Loan Repayment Calculator
Canstar’s calculator can help you figure out how much your personal loan repayments could be and how much interest you will pay.
Simply enter the amount you wish to borrow, the current interest rate, the loan term and how regular the repayments will be.
Other Personal Loan Articles and Guides
Canstar has a variety of articles that you might be interested in if you are considering a personal loan. You can read our content about:
Below is a list of the 5-Star personal loan providers from Canstar’s 2020 Personal and Car Loan Star Ratings (unsecured and secured):
- Credit Union SA
- Endeavour Mutual Bank
- G&C Mutual Bank
- Illawarra Credit Union
- Liberty Finance
- MOVE Bank
- Summerland Credit Union
- Sydney Mutual Bank
You can compare personal loans online using the comparison selector tool at the top of this page.
Author: Nina Tovey
As Canstar’s Editor-in-Chief, Nina heads up a team of talented journalists committed to helping empower consumers to take greater control of their finances. Previously Nina founded her own agency where she provided content and communications support to clients around Australia for eight years. She also spent four years as the PR Manager for American Express Australia, and has worked at a Brisbane communications agency where she supported dozens of clients, including Sunsuper and Suncorp.
Nina has ghostwritten dozens of opinion pieces for publications including The Australian and has been interviewed on finance topics by the Herald Sun and the Sydney Morning Herald. When she’s not dreaming up ways to put a fresh spin on finance, she’s taking her own advice by trying to pay her house off as quickly as possible and raising two money-savvy kids.
Nina has a Bachelor of Journalism and a Bachelor of Arts with a double major in English Literature from the University of Queensland. She’s also an experienced presenter, and has hosted numerous events and YouTube series.
This content was reviewed by our Deputy Editor Sean Callery and Sub Editor Tom Letts before it was published as part of our fact-checking process. You can also read more about Canstar’s editorial team.