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How does a personal loan work?
A personal loan allows you to borrow money to pay for something like a new car, home renovations, a holiday or wedding, or to consolidate your debts. Once you receive the lump sum amount from your lender, you begin repaying it over the agreed payment period, called a term.
A personal loan can be beneficial when you need help getting on top of big or unexpected expenses. But keep in mind, it will need to be paid back along with interest and fees.
Personal loans are just one option for borrowing money, they can carry both benefits and risks, depending on your specific needs and circumstances.
What are the pros and cons of personal loans?
Potential pros
1. You can use them to consolidate debt
If you’re trying to manage a number of existing debts, including credit card debts or other loans, you could take out a debt consolidation loan to roll some or all of these into one repayment. If you can get one with a lower interest rate than you’re currently paying, you could find having a single, smaller monthly repayment easier to manage than multiple fees and repayments at different times.
2. They can be flexible
Personal loans can be used for many purposes, such as paying for a wedding or holiday, or unexpected expenses like car repairs, as well as for debt consolidation. They’re relatively simple to apply for and some can be approved within 24 hours if you need access to funds quickly.
Personal loans also come with a range of options. For example, you can have an unsecured or secured loan, with a fixed or variable rate. They also come with a variety of term lengths (generally between one and 10 years) and some provide the option of weekly, fortnightly, or monthly repayments.
While lenders may not lock you into how to use the money (except with a car loan), some may specify a list of approved uses for the loan. This is something to check before applying.
3. Some competitive interest rates may be lower than credit cards
Personal loans may come with lower interest rates than credit cards. Typically, you’ll also be able to borrow a higher amount. Keep in mind your credit score can influence how much you can borrow and the interest rate that applies on a personal loan.
In the table below, you can see the average, minimum, and maximum interest rates, application and monthly fees for unsecured personal loans and minimum and maximum interest rates and application and annual fees for personal credit cards on Canstar’s database.
Personal loans ($10,000, 5 years)
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Min | Average | Max | |
Interest rate | 5.55% | 11.63% | 29.39% |
Application fee | $90.00 | $215.33 | $670.00 |
Monthly fee | $5.00 | $10.88 | $16.50 |
Source: www.canstar.com.au - 19/05/2026. Based on personal loans on Canstar's database available for a loan amount of $10,000 and a 5 year loan term. Min and average fees based on loans charging a fee. Where rate range applies, average assumes the mid rate is used.
Rewards credit cards
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Min | Average | Max | |
Purchase rate | 13.49% | 20.92% | 28.49% |
Annual fee | $30.00 | $253.89 | $510.00 |
Source: www.canstar.com.au - 19/05/2026.Based on personal rewards credit cards on Canstar’s database, excluding interest-free cards. Min and average fees based on cards charging fees.
Low rate credit cards
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Min | Average | Max | |
Purchase rate | 8.99% | 10.79% | 11.99% |
Annual fee | $30.00 | $53.47 | $108.00 |
Source: www.canstar.com.au - 19/05/2026.Based on personal credit cards on Canstar’s database with purchase rates below 12%, excluding interest-free cards. Min and average fees based on cards charging fees.
Potential cons
1. Fees and interest rates can be high
Personal loans can come with high fees and interest rates, depending on your credit score and financial situation. If you have a lower credit score you may end up paying higher interest rates than those offered by a credit card.
While loans can have lower interest rates than other options like rewards credit cards, you may find that you’re still paying out a significant amount in interest.
If you have savings or can wait until you have some built up, paying for your expenses in this way may be preferable.
2. You’re locked into a contract
Personal loans lock you into a set loan term. Plus, depending on the type of loan you apply for, you may have to make a balloon payment (usually on car loans) or you could be penalised for paying off your loan before the end of the term.
Be sure to review all fees before applying, making note of the comparison rate for a more accurate indication of the loan’s cost.
3. Personal loans increase your debt
Carefully consider if your reason for taking out a personal loan is worth the possible financial strain long term. Be mindful of overspending and taking on too much debt. When your debt becomes unmanageable, it can affect your ability to save money and pay other bills on time.
When should you consider getting a personal loan?
Personal loans can be a way to reach a short-term goal, like paying for home renovations or consolidating debts. They can also make sense when you need extra cash to cover unexpected bills like home or car repairs if your emergency fund is depleted, or in cases where a personal loan works out cheaper than other types of credit.
5 tips to prepare for a personal loan
1. Be realistic with your cashflow
Review and update your budget for an accurate view of your financial health and standing. If you find you only have a small amount of savings left each week, it may not be realistic for you to take on loan repayments as well. Be honest with yourself about what you can realistically afford.
2. Have a clear and purposeful reason for getting a personal loan
Why are you applying for a personal loan? If it’s for everyday expenses like groceries or utility bills, it could be wise to rethink and research other options. Getting a personal loan to help pay for home renovations or to consolidate your debts might be a more worthwhile reason, as these could help you manage debt or build wealth in the long term. Consider the bigger situation, research all your options, and revise your budget.
3. Plan ahead. Reverse engineer your success.
Taking out a personal loan requires financial discipline to consistently meet repayments. However, you may be able to cut back on your budget and see if you can put aside extra cash to make additional loan repayments. Even $50 a month extra can reduce the interest you pay overall, and decrease your repayment term (should your loan allow this).
4. Get comfortable with delayed gratification
We live in a world of instant gratification where credit cards and buy now pay later services allow us to purchase things we don’t have the cash on hand for. It can make it easy to live beyond our means and get ourselves into unnecessary debt.
Before taking out a personal loan, try setting a few financial goals. For example, if you’re considering a car loan, could you make do for a few more months and save a deposit instead of borrowing the full amount right now? Your repayments and total loan amount would be reduced, meaning you’ll pay less in interest!
5. Shop around for the right personal loan (for you)
The more research you do, the better you’ll understand which loan works for your needs. You’ll need to consider things like annual fees, interest rates, the loan term, and the features, terms and conditions like whether you’ll have access to a redraw facility or be able to pay the loan off early.
Thorough research can also prevent you from falling into the trap of making multiple applications, especially for loans you’re not eligible for. This can negatively affect your credit score and eligibility for finance in future.
Will a personal loan help or hurt your credit score?
Used responsibly, your credit score could improve if you consistently make your repayments on time. Additionally, using a personal loan for debt consolidation can reduce your number of open credit accounts and help your score.
On the other hand, if you haven’t properly budgeted to make on-time repayments over the duration of the loan term, late payments and defaulting can harm your credit score.
Also note that when applying for credit, lenders will look at all credit currently available to you like credit card limits and existing loans, which may reduce the amount you’re eligible to borrow.
What about bad credit loans?
If you have a low credit score, it may affect the loans or credit you can apply for. Potentially, you may find you’re only eligible to apply for loans with higher interest rates or unfavourable terms. Be cautious before choosing this option. If your credit score is already low, applying for a new loan could impact it further, as each loan application you make is recorded on your credit report.
What are my options if I’m not eligible for a personal loan?
If you need fast access to a small amount of money and are unable to get approved for a standard personal loan, you may be considering a short-term or payday loan. While these loans can be more easily accessed and often come without interest, they often have shorter repayment terms and very high fees.
In fact, fees on short-term and payday loans are much higher than standard personal loans. Even if you borrow an amount that seems small, your repayments could end up much larger than you bargained for once these fees are tacked on, putting you in further financial distress.
If you’re experiencing financial difficulty or receive Centrelink payments, you may have other borrowing options available to you. This may be in the form of a No Interest Loan Scheme (NILS) loan or an advance payment from Services Australia.
Free financial advice is also available from an independent financial counsellor via the National Debt Helpline (NDH). The NDH can be contacted via its website or on 1800 007 007. The NDH can also provide information and resources on what your rights are if you’re experiencing financial hardship.
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