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A personal loan lets you borrow money to buy a car, a home, a holiday trip, or a gadget, to name a few. You can save thousands in fees with the right personal loan.

This blog discusses how personal loans work and how to apply for one in Australia step by step. We also share the best personal loans and tips to help you find the best deal.

1. What Is A Personal Loan?

A personal loan is a line of credit or lump-sum payment you borrow to fund a wide range of financial needs. You must repay the money with interest in monthly instalments over the loan term. A personal loan is usually between $2,000 and $100,000, which you must pay off within 1 to 7 years.

The loan interest rate can be fixed (remains the same each month) or variable (the bank may alter the interest rate during the loan term). It may differ from the advertised interest rate and depends on factors like your credit score, income, savings, expenses, and debts.

You can use the borrowed money for just about any purpose, including:

• To consolidate your debts

• To pay for unforeseen medical bills and other emergency bills

• To buy a new appliance

• To buy a new vehicle

• To buy a house or renovate your existing one

• To plan a holiday vacation

• To fund a student loan

• To organise Go-Green initiatives

• To perform cosmetic surgery

• To plan a wedding

2. Types Of Personal Loans

You can find personal loans in the following categories:

Fixed Interest Rate Loans 

Here your repayments remain fixed throughout the loan. You know exactly how much you must pay in instalments monthly.

Variable Interest Rate Loans

The lender has the right to alter the interest rate during the loan term changing your monthly repayments. The good side of this loan is that there is no early exit fee. 

If you pre-pay the loan, you do not pay any fee. If you plan to pay back the loan as soon as possible and do not want to wait till the end of the loan term, this loan is a great option.

Secured Loans

With this loan type, you provide collateral to the lender as the security for the loan. It is an asset that the lender may sell to recover the loan amount in the event of non-repayment within the agreed time limit.

Some examples of collateral include a house, car, jewellery, investments like a fixed deposit, etc. Since a secured loan gives security and assurance to the lender for the repayment, they may approve a higher loan amount at a lower fee and interest rate.

Unsecured Loans

As the name suggests, you don't provide any asset as security to the lender. However, the lender charges you a higher interest rate and may require a loan guarantor for assurance of loan repayment. 

These loans are ideal for funding a wedding, holiday trip, or general purchases.

Car Loans

It is a secured loan where you provide your existing car as collateral to the lender. You can take out this loan through a private lender, a bank, or a car dealer.

Bad Credit Loans

Some lenders provide you with a loan if you have bad credit. Look for lenders who accept applicants with a bad credit history. 

Overdrafts

These are unsecured loans linked to your bank account. This facility allows you to withdraw a set amount of credit from your account in case your funds get exhausted. Account holders using the overdraft facility pay the applicable fees.

Debt Consolidation Loans

This loan organises multiple debts into a single loan, making it easier to manage one monthly repayment instead of many. If your new loan comes with a lower interest rate and fees, it will save you money.

3. Where Can You Get A Personal Loan?

You can get a personal loan through banks, credit unions, credit card issuer firms, or financial lenders. All you need is to apply for a loan online or in person and provide your personal and financial information.

Based on the information and documents provided, your lender will consider your overall credit score, employment status, outstanding debts, and income to assess your eligibility for a loan and determine the interest rate.

4. Who Can Apply For A Personal Loan?

Eligibility for personal loans depends on a few things, such as:

• Income Level - Low-income applicants can get approved for low-income personal loans. However, the borrowed amount is lower or in line with the repayment capacity.

• Existing Debt – You can still apply for a loan even if you already have a personal loan or credit card debt. However, you must calculate your total new repayments before applying for a loan.

• If You Are A Pensioner – Personal loans are also available for people currently receiving pension payments.

• Your Credit Rating – Some lenders also provide loans to people with poor credit scores at a higher interest rate. As a little difference in interest rate can save you thousands, you should compare the bad credit personal loan options before applying.

• Don't Meet The Minimum Loan Requirements? You may still be able to apply if your application has a guarantor like a family member, friend, etc. In this case, your loan guarantor is responsible for repaying the loan if you fail. Before you ask them to be a guarantor for you, ensure they understand the risks associated with being a guarantor.

5. What Documents Do You Need To Apply For A Personal Loan?

Lenders want to know your current financial situation and employment to get into a better position to decide if you can repay the debt comfortably at the end of the loan term.

To get this clarity, they may ask you to provide the following documents such as:

• Personal Information – State-issued ID documents, such as a valid passport, birth certificate or driver's licence. You can submit your rental agreement, utility bill, mortgage statement, property tax receipt, voter registration card, or bank/ credit card statement for address proof.

• Existing Loan Details – Please provide your loan or credit card statements.

• Employment Information – Recent payslips, W-2 forms or tax returns to assess your current work situation, salary, any extra income you receive, and your employer's contact information. If you are self-employed, the lender may ask you to provide bank statements, tax returns, or a 1099 form.

• Financial Information – Proof of any savings with other banks. They may also ask whether you stay on rent or own your house, how many dependents you have, and details of your expenses and assets.

• Expected Loan Details – Provide them with the details of the loan you want to apply for – i.e., loan amount, loan duration, type of loan, etc. 

In addition to the above basic information, a loan provider may ask you for the loan and to provide co-signee details.

6. How To Compare Personal Loans?

Like you shop around for a perfect car or your dream home, comparing different loan options can help you get the best deal in terms of the best interest rate and features to suit you.

Here we have listed the factors to compare personal loans before applying for one:

• Interest rate

• One-time fees- Application fee or Loan set-up fee

• Ongoing fees, charges, and penalties like the monthly service fee, missed payment fee, exit fees, loan pre-payment penalty, charges applicable on additional loan features, etc. 

• Terms and conditions for Loan use

• Loan term and associated interest rates

• Expected Loan Amount, APR, and Monthly EMI 

• The type of loan: Unsecured or Secured. If secured, then what collateral is acceptable?

• Is Early repayment Allowed? If yes, the frequency can you repay your loan (weekly, monthly, or fortnightly), and is a redraw facility provided?

• Is Automatic Withdrawal allowed?

• Platforms offered to repay and track the loan (apps, branch, website, etc.) 

• Customer ratings and reviews

• Existing offers

Comparison websites are great for comparing the different personal loan options available based on the above factors. Once you have decided on a loan, thoroughly read the Terms and Conditions to learn about all clauses, inclusions, and exclusions and make a wise decision. 

7. How Easy Is It To Get A Personal Loan?

It takes only five simple steps to apply for a personal loan if you are eligible. Let us find out how:

• Step 1: Compare the loan options to find the right one. You can find various websites, such as Finder, Mozo etc., enabling you to compare loans to help you find the right one.

• Step 2: Go to the lender's website or visit their branch to learn more about their loan products, offers, personalised interest rates, etc.

• Step 3: Once you have found the right personal loan, it is time to start applying for it by filling out forms either online or at the branch.

• Step 4: Provide/upload the required information for identity, employment, and income verification. Some documents they may ask for are a driver's licence, passport, pay slips, bank statements, and employer details. 

• Step 5: Apply and wait a few business days for the lender to inform you about their decision.

8. What Is A Personalised Interest Rate And How Is It Determined?

A personalised interest rate is a risk-based interest rate determined by the history of paying bills and debts. Lenders consider the following factors to come up with a personalised interest rate:

• The loan amount and loan term you have requested 

• Your credit history and credit score 

• Your financial history

9. What Is APR, And How Is It Determined?

The interest payable on the loan is an annual percentage rate (APR). It may vary from one applicant to another based on creditworthiness. The lender also decides on the APR after assessing the applicant's credit score, income, and debts.

As of October 2021, the average APR on a personal loan is 11.4 for those with "excellent" credit scores of 720 to 850.

10. What Are The Best Places To Look For A Personal Loan?

The following are the best sources to apply for a personal loan in Australia:

• Local banks and credit unions

• Non-banking financial institutions, companies, including online finance companies, insurance companies, payday lenders, peer-to-peer lenders, and other nonbank entities. 

• A private loan from an investor

• Friends or family members

11. How To Get A Loan From Commonwealth Bank?

Haven't you applied for a loan before and want to find out how to get a personal loan for the first time? 

Read on to learn the steps to apply for a loan in CommBank and tips to improve your chances of getting it approved:

Step 1: Check The Loan Eligibility Criteria

Before you apply for a loan, the first step is finding out how to qualify for a personal loan. Each loan lender may have different requirements for approving a loan.

Here we have listed the commonwealth bank personal loan requirements to check if you are eligible for the loan:

• Be at least 18 years old

• Hold Australian or New Zealand citizenship, Australian permanent residency, or a suitable visa

• Should be living in Australia

• Should meet minimum income requirements

• Should be employed or receiving a steady income

• Should have a good credit score

• You should have never been bankrupt

Step 2: Choose The Type Of Loan

The above eligibility criteria remain almost the same for all loan types a particular bank offers. In this case, it is CommBank. To find the right loan, you must explore all personal loan options.

Shortlist the ones that fulfil your criteria, such as:

• To pay for a new/second-hand car

• To plan a staycation or a vacation

• To consolidate your debt and stay on top of your finances.

Whatever your purpose,  meet everyone's needs in the best way possible. Presently, the bank offers the following loans to interested loan applicants:  

Use the  to compare various loans based on their fees, interest rates, and features. To get the best deal, look for loans with the lowest rate, no fees, and only the necessary features for your needs.

Step 3: Apply For The Right Amount

Remember that personal loans help meet short-term financial needs and do not leave us with long-term debt. When deciding the loan amount, note that you must repay the original loan (principal) with interest rate and other fees.

So, ensure you can afford the payments on the amount you borrow. Apply for only the amount that you are comfortable with borrowing.

You can take the help of a personal loan calculator to find out your borrowing capacity. You can get an idea of how much you can borrow given your income, lifestyle, and the repayments you can expect at the current interest rate.

Step 4: Check Your Credit Score

Since your credit history plays a significant role in determining a personal loan, you need a good credit score to qualify. Check your credit score beforehand. If your loan application fails due to an unacceptable score, it will negatively impact your score.

There are three key credit reporting agencies, such as Equifax, TransUnion, and Experian, to obtain a free credit report once per year.

Step 5: Show A Good Savings Record

You must show that you are financially responsible for managing and repaying your loan within the set time. 

Contribute regularly to your savings to show the lender that you save a fair amount of money each month and can make regular loan repayments.

Step 6: Apply for the Loan

The last and final step is to apply for a loan. Get all the required documents and fill out the loan application form. Submit it with the supporting documents online or at the branch and wait for the results.

Those who apply online will receive a prompt response just after applying. After the final approval and contract acceptance, you will get the funds in your account within a few business days.

12. How Can A Self-Employed Get A Personal Loan?

You can benefit from a personal loan to bring your business to the next level if you are self-employed. However, you must provide various documentation to lenders to prove you can repay a loan. Loan lenders also generally ask for tax returns instead of payslips to verify the income.

If you can't provide recent tax returns, consider going for a low-documentation personal loan. In this loan type, you do not need to provide payslips/ bank statements from an employer, recent tax returns, or any other income proof.

It makes them suitable for self-employed workers, seasonal workers, and new business owners with irregular incomes. However, before applying for this loan, you must know that it comes with higher fees, interest rates, and lower borrowing amounts due to the risk you present to the lender. Due to this, they are comparatively more expensive than other personal loans.

Also, loan approval is not guaranteed. The decision of the loan approval and its terms will depend on how risky the lender perceives you to grant you a loan. The more documents and assurance you provide them to show your capabilities of repaying the loan, the lower risk you present to the lender.

If you still need the documents, you can reduce your risk and improve your chances by providing movable or immovable assets as collateral for the security. Alternatively, you can give a personal guarantee in a written declaration. These options can get you a cheaper or lower interest rate loan.

Here is what you need to qualify for this type of loan:

• Above 18 years

• Hold Australian citizenship or permanent residency

• Should be employed or have a steady income source of above $25,000 per year

To verify this information, you need to support your loan application with the following documentation:

• Personal ID proof - Australian driver's licence or passport 

• Last two years of tax returns and tax assessment notices from the ATO

• Recent financial statements that mention the profits and losses you have incurred in the business.

• Name, ABN, and business address of your company (if you are a business owner)

• Proof of assets - rental property, investment income, vehicle, etc.

• Recent bank statements for your business and personal accounts to assess your income and expenses.

13. What Is The Minimum Credit Score For Personal Loan In Australia?

The loan approval chances depend on your credit score. The higher your score, the more likely you will get approved for a personal loan with a better interest rate.

The below table shows the credit scores with the respective personal loans for June 2021.

14. How Much Personal Loan Can I Get In Australia?

A loan Lender usually decides the amount based on the type of personal loan you have applied for, your credit score, and your ability to repay the loan. Where most unsecured loans come with a max limit of $50,000, secured loans are up to $100,000.

Generally, you can get a personal loan between $5000 to $100,000 for one to seven years. However, the average is around $20,000 for three years.

15. Useful Tips To Get Your Loan Approved

No lender will guarantee loan approval as they don’t want to risk their business. However, there are some things that you can do on your part to enhance your chances of getting your loan application approved. 

Here are some top tips:

• Be realistic about what repayments you can afford. Lenders will use several criteria to decide your borrowing capacity. When setting unrealistic expectations, there is a higher chance that your application may get rejected, thereby negatively impacting your credit score.

• Personal loans can be an inexpensive way to borrow money if you have good or excellent credit. So, focus on building or maintaining a good credit score. Track your payments, as any debts or missed payments, can lower your credit score, lowering your chances of securing a loan at competitive rates. 

• Develop a habit of saving regularly. It shows lenders that you can manage ongoing loan repayments.

• Avoid applying with several lenders, as it can reduce your credit score.

16. Are Personal Loans Taxable?

A personal loan is a debt. The money you obtain from a personal loan isn’t considered income. So, you don’t need to pay any tax on it. 

However, your profit is taxable if you use the loan amount to generate income.

17. Are Personal Loans Transferable?

No. According to the ASIC’s responsible lending conduct obligations, no lender can transfer a personal loan from one person to another. It is because each loan is designed based on each specific financial situation that might not be the same for another person.

A lender allowing the transfer of a personal loan from one person to another violates ASIC’s obligation to examine the suitability of the loan for the other person.

18. How Many Personal Loans Can You Have At Once?

It is possible to have multiple personal loans at once. However, taking out a second or third personal loan will increase your debt-to-income ratio and make your financial position less advantageous to the lender. It will limit your options the next time you shop for a personal loan.

Also, having multiple loans can adversely affect your credit score. Those with more than one personal loan should consider debt consolidation options to manage their loans effectively.

19. The Best Personal Loans in Australia

20. Conclusion

Whatever your financial needs, taking out the right personal loan is the best way to materialize your dreams.

Make sure you shop around and compare available loan options to find the best interest rate and features that suit you.

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