How to apply for a personal loan

If you’re considering applying for a personal loan in order to finance the purchase of something (such as a car, holiday or wedding), or to consolidate debt, then the process may involve three specific 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?

Your first step when researching personal loans might be to see what lenders there are on the market, as well as what loan product might be suitable for your particular needs.

Generally, when considering personal loans, it’s 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 other features the loan product may have, and the eligibility criteria.

• 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. You can check your credit score for free with Canstar or via the Canstar App.

• Fees and charges: Some loans come with establishment or ongoing fees, and some have fees for missed or even early repayments, so it’s important to get a sense of how much you’ll be charged.

• Comparison rate: This is a figure that estimates the total cost of the loan per year expressed as a percentage, taking into account both the interest rate and most fees and charges. It can help you get a better picture of the total potential cost of a loan.

• 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 earlier, but others don’t, so it’s important to keep this in mind if you want to make additional repayments without a penalty. Variable rate personal loans are more likely to allow for these additional repayments.

• Features: Some loans also come with helpful features, such as a redraw facility which enables you to withdraw funds deposited as additional repayments.

• Eligibility criteria: It’s 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 rating.

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 loan providers won Outstanding Value Awards in Canstar’s most recent Star Ratings and Awards.

Compare Personal Loans

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 and have them on hand before you begin the application process. In general terms, you are likely to need:

• Photo identification documents, such as a drivers licence or passport to confirm your identity and prove that you are over the age of 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. For contractors and self-employed people, you will usually be asked for your most recent personal tax return

• Proof of savings, typically in the form of bank statements, to give the lender a picture of how you manage your finances

• Details of your current employment, as you may be required to supply either your employment contract or a letter of employment

• A list of any assets you own, 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’s a good idea to have it ready, depending on how strict your lender’s requirements are.

How to 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’re 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 and/or request 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 shortly after the application is processed.

Can you make multiple personal loan applications at the same time?

Making multiple loan applications to different lenders within a short space of time can negatively affect your credit score. For this reason, it’s advisable to carefully consider your options first, weigh up lenders based on factors such as the price and features of their loans and your eligibility, and then 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’s 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’s a condition of their licence that they do not supply credit if they believe a borrower cannot pay it back.

According to the Federal Government’s Moneysmart website, 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’re 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’re 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 personal loan application.

Can you apply for a personal loan with bad credit?

Bad credit personal loans are loans aimed at people with low credit scores. 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 have a bad credit score, it’s important to keep in mind that the interest rate you pay may be higher than the rate offered to a borrower with a better credit score. CreditSavvy, a credit resource space created by Commbank, 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’s also important to keep in mind that if you have a low credit score, there are other borrowing options besides taking out a personal loan. If you have a low credit score, you may also have unmanageable debt, and this can lead to serious financial problems.

If you’d like free, independent, 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 provide you with information and resources on what your rights are if you’re experiencing financial hardship.

If you’re experiencing financial difficulty or if you’re receiving centrelink payments, then you may be able to access options such as the Home Equity Access Scheme or No Interest Loan Scheme (NILS) if you meet eligibility requirements. If you’re considering a short-term personal loan, or payday loan, keep in mind there are many risks and potentially very high fees. There may be alternative options that are more suitable for your needs. Moneysmart says you could consider a NILS loan or a Services Australia advance payment, if you’re eligible and require finance urgently.

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 and consider their credit limits
7. Lower the limit on any credit cards you have.

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