Personal Loans Explained: What They Are & How They Work

July 10, 2025

A personal loan is a type of credit product that allows you to borrow a specific amount of money, known as the loan amount, for a particular purpose, such as debt consolidation, home improvements, or covering an unexpected expense.

Unlike credit cards or Buy Now, Pay Later plans, personal loans typically come with either a fixed or variable interest rate, a clear loan term, and a structured repayment schedule. That means you’ll know exactly what your monthly repayments will be and when you’ll be debt-free.

Why should you care? Simple: understanding personal loans helps you make smarter choices, avoid nasty fees and charges, and keep your cash flow under control.

This guide will dive more into what personal loans are, how they work, and how to qualify for one.

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What Is a Personal Loan?

In a nutshell, a personal loan is a sum of money borrowed from a financial institution, such as a bank, credit union, or online lender, and repaid over a set loan term, typically ranging from one to seven years. You’ll see two main flavours:

Unsecured personal loan (or unsecured loan): No asset is tied to the debt. Because the lender takes on more risk, unsecured loans usually carry a higher interest rate range, based on your credit score, credit file and credit history.
Secured personal loan (or secured loan): You put up an asset, like your car or savings account, as security. Secured loans often have lower fixed interest rates and comparison rates; however, if you default, your collateral is registered on the Personal Property Securities Register and may be repossessed.

Common Use Cases

Here are the typical scenarios where personal loans are used:

Debt consolidation: Roll high-interest credit card balances into one loan with a predictable Fixed Rate Personal Loan, helping you get debt under control.
Home improvements & Home Renovations: Fund projects without touching your home loan; some lenders even offer green loans with discounted rates for eco-upgrades.
Car loans: Borrow to buy a car via a buy-and-own a car platform, often bundling car insurance options like comprehensive insurance or Third-Party Insurance.
Special loans for weddings, travel or study: Even though Student Loans are usually government-backed, you might pick a personal loan for short-term education costs or that overseas work stint.
Green loan: Some lenders give a better interest rate if you’re buying solar panels or eco-friendly appliances.

Personal Loan vs Home Loan vs Business Loan

A personal loan is typically unsecured, offering fixed or variable rates over 1–7 years, making it ideal for moderate amounts, such as debt consolidation or home improvements.

A home loan (mortgage) is secured against real estate, spans up to 30 years, and often offers lower interest rates but comes with higher fees and stricter lending checks.

A business loan supports equipment purchases, working capital, or expansion, and typically requires detailed financial statements, collateral, and may include variable or seasonal repayment options.

Each loan type has its own application steps, fees and eligibility criteria, so compare costs and requirements to choose what works best for your needs.

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How Do Personal Loans Work?

Getting a personal loan usually follows a basic roadmap:

1. Decide your loan amount & term

Think about what you need to borrow, whether that’s $5,000 for a home improvement or $20,000 to clear credit card debt, and over what loan term you can comfortably make loan repayments. Most lenders let you choose between a 1–7 year term, depending on your cash flow and debt-to-income ratio.

2. Choose fixed or variable interest

A Fixed Rate Personal Loan locks in a set interest rate for the entire term, so your monthly repayments stay the same.
A Variable Rate Personal Loan means your interest rate fluctuates with the market; your repayments could go up or down, and you might even see bonus features like extra repayments or a redraw facility.

3. Compare rates and fees:

Use a personal loan calculator, typically available on comparison sites, to check estimated interest rates and comparison rates, as well as origination, application, and administration fees.

4. Receive funds

Once approved, the lender disburses the loan amount directly into your bank account via a secure online application process. Some lenders charge a loan approval fee on disbursement.

5. Repay on schedule

Most lenders offer flexible repayment schedules:

Monthly repayments are standard.
Bi-weekly or fortnightly plans can shave off interest and shorten your loan term.
Automatic payments help you avoid missed payment fees or late-payment penalties.

You can often make extra repayments without incurring a penalty, but be aware of early repayment charges. And if you spot a cheaper deal, you might refinance, making sure you fill out a Discharge/Refinance authority form and check your lender’s Australian Credit Licence details.

Personal Loan Requirements

Before you hit “Apply,” lenders will want to know you can handle the repayments. Here’s what you typically need:

Credit score & history: A solid credit rating with no recent defaults or missed payments.
Stable income: Payslips, PAYG summaries or tax returns showing consistent earnings.
Debt-to-income ratio: Proof that your monthly debts don’t eclipse your income.
Proof of ID: Driver’s licence or passport plus proof of residency (e.g., utility bill).
Bank statements: Usually the last 3–6 months to verify cash flow.
Employment details: Employer contact, length of service and position.
Australian residency status: Citizen, permanent resident or eligible visa holder.
Additional support (if needed): A guarantor or joint applicant for more borrowing power.

How to Apply for a Personal Loan

When you’ve picked your ideal loan amount and term, getting started is easier than you might think. Just follow these clear steps to move from “thinking about it” to “funds in your account.”

1. Compare lenders & rates

Use comparison sites or a personal loan calculator to review interest rates, comparison rates, and fees for origination, application, and administration. Spotting hidden costs early helps you choose the most cost-effective deal.

2. Gather your documents

You’ll need proof of ID (driver’s licence or passport), recent bank statements, payslips or tax returns, and a utility bill for residency. Having everything on hand shrinks your application timeline.

3. Work with a broker

A reliable broker can negotiate with lenders, clarify loan details and ensure you meet responsible lending rules. They’ll handle the paperwork and chase approvals, often at no extra cost.

4. Submit the application

Fill in your personal and employment details, loan purpose and bank account info via the lender’s secure portal. Check whether there’s an application fee—usually $0–$150—and budget for it.

5. Await approval & sign

You may get pre-approval within minutes and full approval in 1–3 business days. Review your contract for early repayment or missed payment fees, then sign digitally to lock in your rate.

6. Receive your funds

After signing, the lender disburses the loan directly into your account, often within 24–48 hours. Please note that origination or approval fees may be deducted from the net amount you receive.

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Frequently Asked Questions (FAQs)

What score do you need to get approved for a personal loan?

Most Australian lenders look for a credit score of around 600–650 or higher, but your overall credit history and debt-to-income ratio also play a big role.

What is a guidance line loan?

A guidance line is a non-binding, pre-approval estimate that shows how much you might borrow based on your initial details before you submit a full application.

What’s the best thing to say for a personal loan?

Be clear and honest: explain your loan purpose (e.g., debt consolidation or home improvements) and show how you’ll comfortably meet the scheduled repayments.

What is the easiest loan to be approved for?

Secured personal loans are generally the easiest, since offering collateral reduces lender risk. Small, short-term secured loans can be even simpler to obtain.

What bank is better for a personal loan?

There’s no one “best” bank—big four banks (ANZ, CBA, NAB, Westpac) and challengers (UBank, ING) frequently compete on rates and fees. Always compare their comparison rates for your specific loan amount and term.

How much would a $5,000 loan cost per month?

On a 3-year term at roughly 7% p.a., you’d pay about $155/month. Stretch it to five years at the same rate, and repayments drop to around $100/month. Your exact figure depends on your agreed interest rate and term.

Conclusion

When it comes down to it, personal loans can be a simple way to tackle debt, fund renovations or cover life’s unexpected costs, without leaving you guessing about rates or repayments.

Our Sydney mortgage brokers break everything down into straightforward options and help you pick the plan that fits your budget and timeline. We serve wider Sydney, including Northern Beaches, and we’re here to offer you a free consultation whenever you’re ready to talk about personal loans.

Give us a call on 0403 316 686 or head to mortgagebrokersnorthernbeaches.com.au to book a free chat today!