What is a personal loan?
If you need money to pay for a car, home renovations or even your wedding, you may consider taking out a personal loan. So what is a personal loan and what are some of the things to consider when comparing different loan options?

If you need money to pay for a car, home renovations or even your wedding, you may consider taking out a personal loan. So what is a personal loan and what are some of the things to consider when comparing different loan options?
What is a personal loan?
A personal loan allows you to borrow a specific amount of money to pay for larger than usual purchases like a vehicle or renovations to your home. You then have to repay the loaned amount plus interest over an agreed timeframe, known as a term.
Personal loans can typically be used for some important life events and other big expenses, such as buying a car, debt consolidation, holidays, home renovations like upgrading your bathroom and weddings. This makes them different to student loans, car loans and home loans, as personal loans can be used for a variety of different purchases. It’s worth checking with the specific lender for details on what you may or may not be able to take out a personal loan for.
Personal loans can come with a fixed or variable interest rate and you can also choose to take out a secured or unsecured loan. The interest rate that you receive may be influenced by factors including if the loan is secured or unsecured, if you have a loan guarantor and what your personal credit score is. You can check your credit score for free with Canstar or via the Canstar app.
What is a secured personal loan?
Secured personal loans require you to provide an asset as collateral for the loan. For example, a secured car loan could use the car you are purchasing with the loan as collateral. If you are unable to repay the loan, the lender may be able to seize your asset and sell it to recoup the debt. This added financial security for the lender typically means secured loans come with lower interest rates than unsecured loans.
Compare Secured Personal Loans
What is an unsecured personal loan?
Unsecured personal loans do not require you to provide an asset as a security to the loan. The loan is still subject to your ability to repay it and if you aren’t able to do so, the lender may take you to court to recover the money you have borrowed. The interest rates on unsecured loans are higher on average than secured personal loans, which reflects the higher risk of losing money for the lender.
Compare Unsecured Personal Loans
How does a personal loan work?
To get a personal loan, first you need to decide on a suitable loan and lender for your needs. This can be done by comparing personal loans with Canstar. A lender could be a bank, credit union, online personal loan lender or other financial institution.
Once you’ve made your decision, you can generally complete an application online. The lender will then review your application and assess factors such as your income, expenses, credit score and if you have any outstanding debts. Lenders in Australia must adhere to responsible lending laws, which instruct them to put reasonable effort into ensuring a loan is suitable for your financial situation. If you are approved, the lender will then give you the loan terms, which you can either accept or reject. Once you come to an agreement, you will need to finalise any remaining loan paperwork to proceed.
With everything signed off, the lender will fund the loan, meaning they’ll transfer the loan amount into your bank account. Depending on certain usage restrictions, you should be able to use the loaned money as you see fit. You will also need to begin repaying the loan according to the terms in your loan agreement.
How can you get approved for a personal loan?
Each lender will typically have different requirements for approval. There are a few things you can do to improve your likelihood of being approved for a loan:
- Improve your credit score: By improving your credit score, you can show lenders that you are a trustworthy borrower and can make repayments when required. Improving your credit score may also lead to you being offered better interest rates by lenders.
- Reduce outstanding debts: The amount of debt you have is something that lenders will look at when assessing your loan application. If you are able to pay back or reduce your outstanding debts or even lower credit limits on financial products like credit cards, this will often be looked at favourably by lenders.
- Get a loan guarantor: Family members and friends can often assist you as a guarantor on your personal loan. This means if you are unable to repay the loan, it will be up to them to pay it back. Being a guarantor can potentially lead to a significant financial burden, so it’s worth having an honest conversation with your potential guarantor to ensure that they are aware of the risks.
What is the difference between a personal loan and a payday loan?
A payday loan, also referred to as a small amount loan, can provide quick access to funds, usually up to $2,000. You’ll typically have between 16 days to 12 months to pay the amount back. While this type of loan cannot charge interest like personal loans, they instead charge hefty fees, such as establishment fees (which can be up to a maximum of 20% of the amount borrowed), monthly service fees (up to 4% of the amount borrowed) and late repayment fees.
For example, a payday loan of $2,000, could have a $400 establishment fee, with an $80 monthly service fee. If you took a year to pay back the loan, the total amount paid would be $3,360. On the other hand, if you were to pay back a $2,000 personal loan in one year, with an 8% p.a. interest rate and monthly repayments, you would only have to pay back $2,088 in total (not taking into account any relevant fees). The Australian Government’s MoneySmart website says that there are often cheaper ways to borrow money than through payday loans.
What is the difference between a personal loan and a personal line of credit?
A personal line of credit works differently to a personal loan and acts similar to a credit card, in that you have a set credit limit that you can spend up to and you will be charged interest on any outstanding balances. The more money you spend, the less available credit you will have. You can increase your available credit back up to its limit by making payments toward your credit line.
A personal line of credit will remain open, unlike a personal loan which typically has a fixed loan term in which the loaned amount must be paid back. If you remain in good standing with your lender, your personal line of credit may stay open indefinitely.
How to compare personal loans
It can be important to compare personal loan options to make sure you are getting the right one for your personal circumstances. Some key considerations include: the interest rate and if you can qualify for a lower one, whether the interest rate is at a fixed (stays the same) or variable rate (can change due to market conditions), the loan term length, if you have the flexibility to make extra repayments (often via a redraw facility), and any fees that might apply.
What is the interest rate?
This is the amount of interest that you will pay on the loan each year, often expressed as a percentage per annum (p.a.). Interest rates can vary significantly depending on the provider, as well as factors like whether the loan is secured or unsecured and your personal circumstances.
It’s a good idea to also check out the loan’s comparison rate. This rate takes into account the loan’s interest rate, as well as most upfront and ongoing fees and charges. This is designed to give you a closer estimate of the total cost of the loan each year.
You can view the current interest and comparison rates for personal loans using Canstar’s comparison tables.
Can I qualify for a lower personal loan interest rate?
The interest rate that you are charged will typically depend on your personal circumstances like your credit score. So before you apply for a personal loan, you might want to check your credit score and see if there are any steps you can take to help improve it if needed.
Some providers may also offer a lower interest rate if you have a loan guarantor. This is where a family member or friend guarantees the loan and will be responsible for repaying it in the event that you miss repayments or cannot repay the loan. It’s important to carefully weigh up the risks before entering into this kind of arrangement.
Are personal loan interest rates fixed or variable?
Personal loans can come with either a fixed or variable interest rate. A fixed rate personal loan means that the interest rate will stay the same for the life of the loan. A variable rate means that the interest rate may change during the term of the loan, often due to economic conditions.
While fixing your interest rate can give you certainty that your repayments will stay the same for the term of your loan, a potential downside is that the interest rate could go down during the life of your loan. As a result, you may end up paying a higher amount of interest. You also may be required to pay a fee if you want to pay off the loan earlier than the agreed term.
Compare Fixed Rate Personal Loans
With variable rates, you may benefit if the interest rate goes down, but you will pay more if the interest rate rises. Personal loans with a variable rate may not have an early repayment fee, which may be beneficial if you want to repay the loan early.
Compare Variable Rate Personal Loans
What is the loan term?
The loan term is the period of time you have to pay off the loan. For personal loans, the loan term usually ranges from one to seven years. By taking out a loan with a longer term, you will usually have lower repayments. However, it also typically means you’ll pay more interest over the life of the loan.
Can I make extra repayments on a personal loan?
Some lenders will allow you to make extra repayments on your loan, which may help you to pay off the loan quicker and accrue less interest overall. However, it’s worth checking whether additional fees apply. For example, a personal loan with a fixed interest rate may charge fees if the loan is paid off early, as the lender would be missing out on an agreed amount of payable interest.
You may be able to make these extra repayments through a redraw facility. A redraw facility also allows you to access the money from those extra repayments, which can be useful if unforeseen bills arise. Redraw facilities may come with minimum and maximum withdrawal limits and have associated usage fees. It’s important to check with your lender to see how their redraw facility operates and if there’s any fees involved.
What are the fees?
Many personal loans have an application fee that’s payable when you apply for the loan. Some may also charge monthly service, missed payment and early repayment fees. You may also be charged a fee if you make additional repayments. These will vary depending on the provider, so make sure to check what fees apply and how much they are.
If you’re comparing personal loans, Canstar’s comparison tables could be a good place to start. Canstar also assesses personal loan providers each year as part of our Personal and Car Loan Awards. Check out which lenders have received an Outstanding Value Award and which loan products received a 5-Star rating in the Personal Loans comparison table.
There are other ways you may be able to potentially access credit such as through credit cards or personal lines of credit. However, the interest rate may be higher than a personal loan. Before taking out any financial product, it’s important to carefully weigh up the risks involved. A loan product’s terms and conditions can be found in its Product Disclosure Statement (PDS). It can also be important to read its Target Market Determination (TMD) and other relevant documentation when making your decision. Understanding how much the loan will cost you overall and whether the repayments can fit into your budget is also an important consideration.
-
Additional repayments
-
Redraw facility
-
Top-up facility
-
Application fee: $0
-
Annualised fee: $0
-
Loan terms available: 1 year to 7 years
-
Additional repayments
-
Redraw facility
-
Top-up facility
-
Application fee: $0
-
Annualised fee: $0
-
Loan terms available: 5 years
-
Additional repayments
-
Redraw facility
-
Top-up facility
-
Application fee: $0
-
Annualised fee: $0
-
Loan terms available: 3 years to 7 years
Fast quote. No account required.
Won't affect your credit score. GET YOUR RATE NOW.
-
Additional repayments
-
Redraw facility
-
Top-up facility
-
Application fee: $575
-
Annualised fee: $0
-
Loan terms available: 3 years to 7 years
Canstar may earn a fee for referrals from its website tables, and from Sponsorship or Promotion of certain products. Fees payable by product providers for referrals and Sponsorship or Promotion may vary between providers, website position, and revenue model. Sponsorship or Promotion fees may be higher than referral fees. Sponsored or Promotion products are clearly disclosed as such on website pages. They may appear in a number of areas of the website such as in comparison tables, on hub pages and in articles. Sponsored or Promotion products may be displayed in a fixed position in a table, regardless of the product’s rating, price or other attributes. The table position of a Sponsored or Promoted product does not indicate any ranking or rating by Canstar. For more information please see How We Get Paid.
Cover image source: DocPhotos/Shutterstock.com
This article was reviewed by our Finance Editor Jessica Pridmore before it was updated, as part of our fact-checking process.

- What is a personal loan?
- What is a secured personal loan?
- What is an unsecured personal loan?
- How does a personal loan work?
- How can you get approved for a personal loan?
- What is the difference between a personal loan and a payday loan?
- What is the difference between a personal loan and a personal line of credit?
- How to compare personal loans
^Read the Comparison Rate Warning.
Try our Personal Loans comparison tool to instantly compare Canstar expert rated options.
^Read the Comparison Rate Warning.