How to get a personal loan

A personal loan allows you to borrow money to finance a one-off purchase or event, such as a car, a holiday, a wedding, or home renovations.

Of course, you have to repay the amount with interest over a fixed term, anywhere between one and seven years usually.

But lenders don't hand out personal loans to just anyone. You'll need to tick more than a few boxes to secure one, so read on to give yourself the best chance of approval.

What personal loan should I choose?

Personal loans aren't a one-size-fits-all product. There are many different types, often tailored for specific purposes, including:

• Secured personal loans

• Unsecured personal loans

See also: Secured vs unsecured personal loans: Which is right for you?

• Line of credit loans and overdrafts

• Debt consolidation loans

• Loans for students

• Car loans if you're borrowing for a car, and

• Loans with either fixed or variable interest rates

See also: What are the different types of personal loans?

Just as you may have shopped around for the car or holiday you're looking to purchase, it's important to put just as much research into which loan product is best for you. It can literally save you thousands of dollars in interest and fees.

Here's a selection of some of the lowest interest rates on the market to give you a ballpark idea:

Important Information and Comparison Rate Warning

It may even be that you don't require a personal loan. Consider whether a different product might be more suited to your purposes, such as a credit card.

For some circumstances, you may even be able to access a no-interest loan to pay for unexpected repairs, household essentials, medical expenses, rent or council rates, or to get yourself back on your feet after a natural disaster.

Compare interest rates and fees on personal loans

Once you've settled on the type of loan that suits you best, you'll need compare the all-important interest rate and fees attached to them.

Going for the lowest interest rate may seem the logical thing to do but sometimes this can come with a catch. You may be hit with considerable fees in applying for, maintaining, and exiting your loan and these could cost you more in the long-term than a loan with a slightly higher interest rate.

Always check the comparison rate that must accompany the advertised interest rate for any loan. As a rule of thumb, the closer it is to the advertised rate, the lower the fees will be.

Getting a personal loan with an above-average interest rate and high fees can cost you thousands of dollars more over the course of a loan term as the table below highlights, even without factoring in any fees:

Total personal loan repayment across different interest rates (five-year term)

	$20,000 loan	$30,000 loan	$50,000 loan
6% p.a. interest rate	$23,799	$35,399	$58,598
10% p.a. interest rate	$26,096	$38,845	$64,341
15% p.a. interest rate	$29,148	$43,422	$71,970

You should also compare loan features (like redraw facilities) and whether you can make extra repayments without paying a fee. It's also worth checking if there's an early exit fee attached if you manage to pay off your loan sooner.

Loan terms are also important. Longer terms may mean lower repayments, but you'll also likely end up paying more in interest over the life of the loan.

See also: 5 things to look for in a personal loan

How your credit score affects a personal loan application

Before you apply for any loan, it pays to do a check of your credit score.

You have a legal right to access a copy of your credit report for free and these can be obtained online through Australia's three main credit reporting agencies:

• Experian

• Equifax

• illion

It's also worth noting that different agencies may be holding different information so you may have a credit record with more than one of them.

See also: Nearly half of all Aussies have never checked their credit report

Generally, credit scores are expressed on a five-point scale ranging from low to excellent. Where you fall on the scale is important as having a 'good' credit score - from average to excellent - not only boosts your chances of being approved for a loan but may also give you access to better interest rates.

It can also alert you to issues with your credit rating that you may be able to rectify, or at least improve, before you submit a loan application.

See also: How does a personal loan impact your credit score

Eligibility criteria for personal loans

Before you go ahead and make a loan application, it's imperative you check whether you're eligible to apply for it. Different lenders have different eligibility criteria but here's a general rundown of what many lenders will require:

• You must be 18 years or over

• You must be a permanent Australian resident

• You must currently be employed and have a regular income

• You must be able to demonstrate a good credit history for the last five years

• You must be free from bankruptcy for the last seven years

There may be other criteria that various banks and lenders will have for certain loans. For example, some will require a certain minimum income threshold, while others may accept those on pension or Centrelink payments.

Some lenders will be more lenient with their credit score requirements than others, while there are others that specialise in offering 'bad credit' loans to those with a difficult credit history.

You're also unlikely to be allowed to borrow beyond the lender's minimum and maximum loan amounts, so be sure you apply for a loan that meets your borrowing needs and your credit history.

What documents do you need for a personal loan?

When you're ready to apply, you'll need to gather a number of documents that the lender will need in its assessment process. The documents most lenders will require include:

• Your personal information, like your name, address, contact details etc.

• At least 100 points of ID, which includes your driver's license, passport, Medicare card etc.

• Proof of income, usually your last two pay slips

• Bank statements, which you can download from your bank so the lender can assess your savings/spending habits

• Details of any assets (such as shares or properties you own) and liabilities (such as credit cards and other loan debts you may have)

Depending on what you're borrowing for, you may also need to provide the lender with extra information. For example, people borrowing for a car typically need to provide the lender with a tax invoice for the car they're buying, details of the make/model, etc., and evidence it carries comprehensive car insurance. For a renovation, you will likely need to show them a contract with a builder.

How to apply for a personal loan

Once you've done the groundwork and have your documents gathered, you can apply for the personal loan that is best suited to your needs. This can be done either:

• online

• over the phone

• in a bank branch in person

Applying online is generally the quickest option, with some providers claiming it can take as little as five minutes.

Tips for getting a personal loan approved

Make sure you meet the loan criteria

It sounds very basic but potential borrowers get rejected for loans every day because they haven't met a lender's stated requirements. Make sure you've read them and are eligible to apply.

Apply for a loan you can afford

Ensure the loan amount is in line with your income level, existing liabilities, and what you can comfortably pay back according to your circumstances. Personal loans are designed for the shorter-term, not for saddling you with a lifetime of ongoing debt.

You may need to rethink how much you need to borrow - perhaps opting for a cheaper car, a less extravagant wedding or holiday, or a renovation without all the bells and whistles. Being realistic will give you a far greater chance of getting approved.

See also: Car Loan Calculator with Balloon Repayment

Have a good credit rating

As we've discussed, your lender is going to check you out. Simply put, the better it is, the better chance you've got of getting approved, borrowing a larger amount, and achieving a better interest rate.

Have a good savings/spending history

If you've never had a loan or any debt before and don't have a credit history, a lender will look at your bank statements to see what sort of saver and spender you are. Having a history of diligent saving, or putting money aside from regular income payments, will stand you in good stead. On the other hand, account overdraws will not be looked upon favourably.

Does it cost anything to apply for a personal loan?

Some lenders can charge an application or upfront fee. This is to cover the cost of doing the paperwork and assessing your application. These can average around $270 but can be significantly more for some lenders. Be sure you know what you're up for before you apply.

There will also be loans that don't charge any upfront fees, but these may come with higher interest rates or other ongoing loan charges to extract your cash once you've signed up to the loan. Again, doing your research is paramount.

How long does it take to get approved for a personal loan?

This will depend on the lender but, in most cases, getting approved (or rejected) for a personal loan is a surprisingly quick process. Some providers will give you an answer within 1-2 business days, others can give you approval within a few hours, while those with up-to-date online approval software can give you the go-ahead within 10 minutes (or so they say).

There are even some lenders offering smaller loans that claim to offer 60-second approval. This may sound impressive, but you may want to be wary of brands that offer such a quick turnaround. You may be better off going to a lender who will more carefully consider whether you can actually afford to maintain the loan you're applying for.

What happens to my credit score if my loan application is rejected?

You may be disappointed, but getting rejected for a loan could also be a negative on your credit history. While it may not have a major impact on your credit score, it will be noted on your file.

Credit reporting agency Experian says when a lender accesses your credit report to check your borrowing credentials, a so-called 'hard enquiry' is added to your file. The inquiry will remain on your record for two years, but the lender's decision doesn't get recorded.

Having too many hard inquiries in a short period of time can indicate to some lenders you're relying too much on credit to manage your finances. However, Experian says multiple inquiries applying for the same type of loan can be considered 'rate shopping', so these won't be recorded as multiple inquiries if they're within a brief window.

As a rule of thumb, your credit history will look 'cleaner' if it's not littered with loan inquiries. That's why it's best to do your research and apply for a loan you are eligible for and that best suits your individual circumstances.

Savings.com.au's two cents

When it comes to obtaining a personal loan, research is everything. There are myriad loan products on the market, some tailored to specific purposes such as car loans or debt consolidation loans. These can offer terms and conditions that are better suited to your purposes.

Be realistic in how much you can afford to borrow and remember that personal loans are designed to be short-term for one-off or special purchases. Make sure you can meet the repayments so your loan doesn't become a long-term drag on your finances.

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