If you’ve ever run short on cash, you’ve probably considered personal finance at some point or another. One of the most common ways to access personal funding is a personal loan from a bank, an online lender or through a broker. As opposed to a credit card, personal loans allow you to access a lump sum upfront and have greater optionality when it comes to the terms of the credit.

A personal loan is usually for a value between $2,000 and $100,000, which you will repay monthly over a year or more. There are two types, secured (backed by an asset you own) and unsecured (reliant on your cash flow and credit score). The beauty of a personal loan is that you can use it for any purpose – consolidate your debts, fund a holiday, or purchase a new pet. Whatever you choose to use it for, you need to understand how they work so you can get the most out of them.

What do I need to apply for a personal loan?

Since the lender will assess your ability to repay (the risk of lending to you) when determining the loan’s cost (interest rate), they need to know a little bit about you. First of all, you will need to be over eighteen, be an Aussie citizen (or PR) and be employed or otherwise earn a reliable income. At a minimum, you will need to supply:

• Your passport or drivers licence
• Your income – payslips, bank statements or tax returns
• Your other loans or debts you may have

“Online lenders will often approve your loan fastest, while a broker is there to help you compare your options.”

If you’re applying for a secured personal loan, you will also need to supply proof of your assets, particularly those you wish to use as security. Once you have all the documents, applying for a personal loan is relatively easy – banks, non-bank lenders and personal finance brokers will all help you apply online or in person. Remember that online lenders will often approve your loan fastest, while a broker is there to help you compare your options to get the best deal.

The difference between secured and unsecured personal loans

One of the most critical choices you’ll make when applying for a personal loan is whether it’s secured or not. Both have their benefits and disadvantages. Secured loans use your existing assets (or the asset you’re purchasing) as collateral for the loan. This usually means you can borrow more money at a lower rate. The downside here is that the collateralised asset can be taken back by the lender if you fail to make your payments.

Unsecured loans are popular because they meet the needs of many who wade the waters of personal finance. You’re short on money, and you need it fast. Unsecured loans do not require any assets to be approved, and you have the flexibility to use the funds on whatever you want. This is, of course, compensated by higher interest rates and a lower borrowing capacity; we can’t always have the best of both worlds!

How to reduce the cost of your personal loan

No matter which personal loan you choose, there are a few ways to reduce your repayments. Here are three of the easiest:

• Select a shorter term. The shorter the loan is, the less interest will accrue. As long as you can afford the repayments, paying your loan off quicker (even if the monthly repayments are higher) will save potentially thousands across the life of the loan.

• Research loan fees. Not all personal loans are equal. While the headline interest rate may appear the same between options, you need to consider the ‘comparison rate’. The comparison rate takes into account all extra fees and charges associated with a finance product. 

• Variable rates and early repayments. Paying off your loan before it falls due is the best way to reduce your interest charges. Typically variable interest rate loans allow you to make additional payments without charging you a fee – so take this into account when making a choice.

Putting it all together: the pros and cons

Personal loans are a fantastic tool when used correctly and responsibly. While there is a formal application process (unlike an already approved overdraft or credit card), personal loans come with lower interest rates and are easier to access than a new (or refinanced) mortgage. Non-bank lenders make the process more straightforward than the banks, often approving your loan within the day. Take into account any additional fees that may impact your repayments, and strive to pay off the loan as soon as you can to reduce your lifetime interest charges.

There’s a lot to think about when it comes to applying for a personal loan, so it’s best to enlist someone experienced to help. Find an expert personal finance broker to help you assess your situation and help in the application process. Personal finance brokers will take the time to understand your financial situation then compare products and lenders on your behalf. Capital Plus Finance is an experienced personal finance broker that stays true to our purpose. The Capital Plus Finance team will do everything we can to help you secure a suitable finance solution for personal or business use. Please give us a call anytime to find out more or to have an obligation-free chat about your funding situation.