Personal loan brokers: what do they do?

When you start looking for personal loans, you may find that the market is crowded, with a large array of lenders to consider. This is where some people may choose to speak with a personal loan broker.

If you’ve never used a personal loan broker before, or are just curious about what they do, we’ve broken down the basics for you, as well as the potential benefits and drawbacks of working with one.

What is a personal loan broker?

A personal loan broker acts as an intermediary between individuals who want to borrow money, and institutions like banks and credit providers who lend it. A broker’s job is to consider the various loan products on the market and to recommend loans that are suited to their clients’ particular budget, needs and situation.

How do personal loan brokers work?

A personal loan broker will typically have a ‘lending panel’ ‒ this is a group of lenders that they most commonly deal and do business with. If you sign up with a loan broker, they will consider your particular needs against their panel of lenders, and find a suitable loan product or products that they will then recommend to you.

What are the benefits of a personal loan broker?

Some benefits of working with a broker include convenience, the assurance that the law requires them to work in your best interests, and the potential to better safeguard your credit score.

They can offer convenience

A broker can take care of the legwork for you when searching for a personal loan, and sort through the available options to narrow them down. Additionally, many personal loan brokers offer online applications, meaning you may not need to meet with them in person.

They are bound by responsible lending laws

Personal loan brokers are bound by Australia’s responsible lending laws. This means that they are required to consider your needs and circumstances when making their recommendations, and must not enter into a credit contract with you, suggest a credit contract to you or assist you in applying for one if that contract is unsuitable for you.

They may help you better maintain your credit score

If you have applied for a number of loans and been knocked back , you may find that your credit score has been negatively affected. But assistance could help to increase your application’s likelihood of approval, therefore helping to maintain your credit score. If you already happen to have a low credit score, a personal loan broker may be able to help you by suggesting lenders who will consider your application.

What are the drawbacks of a personal loan broker?

Working with a broker could have some drawbacks. These include the fact that they may prioritise their commission, charge you a fee, and only offer loans from a limited array of lenders. A broker also cannot guarantee you a rate from a lender.

They may prioritise their commission

Many personal loan brokers work on a commission basis, meaning a lender will pay them a commission for referring you as a customer. So borrowers could be concerned that if faced with a choice between two suitable lenders, they may recommend the one that pays them a higher commission, even if the deal ends up being less favourable to you.

Under Australia’s responsible lending guidelines, brokers are required to act in the best interests of their clients, and disclose any ‘indirect remuneration’ they are likely to receive from referring you to a lender, which includes commissions. are concerned, you can always ask a broker how they are paid, and if there are other, potentially more favourable deals available.

Their range of lenders may be limited

Personal finance brokers typically work with a panel of lenders, offering a variety of loans and deals. Any one broker may only have a small panel of lenders, and there are certain lenders who do not work with brokers at all. This means there may be a more favourable deal for you elsewhere on the market. Before you decide to work with a broker, it’s important to do your own research into loans on the market.

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They may charge fees

While some personal loan brokers work on a commission basis, others charge an upfront fee. This may seem like the more transparent option, but it’s worth keeping in mind the size of the loan you intend to take out, and the fee your broker charges. It may be the case that, if you factor in the broker’s fee, you’ll find that you’d actually save money by going to a lender directly, and bypassing a broker entirely.

They cannot guarantee you a rate

While personal loan brokers can offer you an estimate of what a lender will offer in terms of a rate and associated fees, they cannot offer a guarantee. Brokers are intermediaries and do not have the final say in what lenders charge, so you may find, even after going through a broker, that a lender may charge you a higher rate or higher fees than you anticipated after reviewing your application.

What questions should you ask a personal loan broker?

You may like to ask a personal loan broker about how many lenders they deal with, how their commissions are structured, what fees they charge, terms and conditions in the product disclosure statement (PDS), and what fees and charges are associated with the loan.

1. How many lenders do they deal with? Generally, the more lender options a personal loan broker can offer you, the better. If a broker only recommends products from two or three lenders, there may be little advantage to using their services.
2. How are their commissions structured? It may be worth asking if a broker is paid by particular financial institutions for referring your business to them, and if so, whether the payment is a one-off or will be paid to them on a recurring basis, as long as you have the loan (sometimes called a trail commission).
3. What fees do they charge? Before signing up with a personal loan broker, it is important to make sure you have a clear understanding of the fees you will be charged. This will also allow you to consider whether it might be more cost-effective dealing directly with a bank or lender.
4. What are the terms and conditions of the loan? Loans come with terms and conditions, such as the repayment period, whether the rate is fixed or variable, and any other penalties or special conditions that may apply. It is important to ask your broker about this information to better understand the loan you’re signing up for. If the broker is unsure of anything and you have questions about the terms and conditions of a loan, you can also speak with a lender directly and find out more details
5. What fees and charges are associated with the loan? While not all brokers charge fees, there are typically a variety of fees associated with loans. Depending on the loan, these can include upfront or ongoing fees, or even fees for early repayment. These fees will be charged in addition to the interest charges that apply to a loan, and it is worthwhile to ask your broker about the fees associated with any product they might recommend.

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