Personal loans, explained
A personal loan is a flexible way to borrow a set amount for almost any worthwhile purpose, from consolidating debts to a home renovation. This guide covers the two main types, what shapes the rate you are offered, and how to tell a good deal from a dressed-up one.
Secured or unsecured
A secured personal loan is backed by an asset, often a car, which the lender can repossess if you default. Because the lender carries less risk, secured loans usually offer lower rates. An unsecured loan pledges no asset, so approval and pricing lean more on your income and credit history, and rates tend to be higher. Neither is automatically better. It depends on whether you have an asset to offer and how you weigh a lower rate against putting that asset at risk.
Fixed versus variable
A fixed rate stays the same for the term, so your repayments are predictable and easy to budget. A variable rate can move up or down over time, which may help or hurt depending on where rates head. Variable loans more often allow unlimited extra repayments, while some fixed loans limit them. Decide which matters more to you: certainty, or flexibility.
The comparison rate is your friend. Two loans can advertise the same interest rate and cost very different amounts once fees are counted. The comparison rate exists precisely so you can compare the true cost in a single figure.
What affects the rate you are offered
- Credit history. A stronger track record of repaying on time generally unlocks lower rates.
- Income and expenses. Lenders assess whether repayments are affordable alongside your other commitments.
- Loan amount and term. The size of the loan and how long you take to repay both influence pricing.
- Security. Offering an asset can lower the rate, at the cost of putting that asset at risk.
What to compare
| What to look at | Why it matters |
|---|---|
| Comparison rate | The single figure that reflects the true cost including most fees. |
| Fees | Establishment, ongoing and early-exit fees add up over the term. |
| Repayment flexibility | Can you make extra repayments or redraw without penalty? |
| Term length | Shorter terms cost less overall but demand higher monthly repayments. |
A note on debt consolidation
Rolling several debts into one personal loan can simplify life and sometimes lower the rate, but it only helps if the new loan genuinely costs less over its full term and you avoid running the old accounts back up. Always compare the total interest across the whole term, not just the monthly repayment.
Common questions
What can a personal loan be used for?
Most personal loans are unrestricted, covering things like renovations, medical costs, a wedding or consolidating other debts. Some lenders offer purpose specific loans at a lower rate where the purpose reduces their risk, such as a secured loan for a vehicle. Read the contract, because a small number of loans do restrict use.
Is a personal loan cheaper than a credit card?
Usually, yes. Personal loan rates sit well below standard credit card purchase rates, and the fixed term forces the balance down rather than letting it revolve. The trade off is less flexibility: you borrow a set amount once, and redrawing is generally not an option. A card can be cheaper if you genuinely clear it inside the interest free period every month.
What is the difference between a fixed and variable personal loan?
A fixed personal loan locks the rate and the repayment for the full term, so you know the total cost on day one. A variable loan can move with the market and usually allows unlimited extra repayments and early payout without a fee. Fixed suits a tight budget; variable suits anyone planning to clear the loan early.
Will consolidating debt into a personal loan save me money?
It can, but not automatically. Moving high rate card balances onto a lower personal loan rate reduces the interest, and the fixed term forces the balance down. The trap is stretching a two year debt across five years: the rate falls but the total interest paid can rise, and the freed up card limit tends to fill again.
How is a personal loan rate set?
Most Australian lenders use risk based pricing, so your rate depends on your credit history, income, existing commitments and whether the loan is secured. Two people can apply for the same advertised product and be offered different rates. The advertised rate is generally the best case, so treat it as the floor rather than the expected outcome.
General information only. This guide explains how a product works in Australia. It is not financial, credit or legal advice and does not consider your personal situation. Rates, fees and criteria vary by lender and change often, so confirm current terms with the provider and read the product documents. Free independent help is available from the Australian Government at moneysmart.gov.au.
Personal loan estimator
Estimate only. Assumes a fixed rate and equal monthly repayments over the full term. It ignores fees, charges and the comparison rate, so real repayments will differ. Not a quote or an offer.