Applying for a personal loan for the first time: 5 things to know

Secured or unsecured, advertised rate vs offered rate, credit enquiries, fees and how much to borrow. What first-time borrowers should understand before applying.

Before you apply for your first personal loan, know whether you need a secured or unsecured loan, expect the rate you’re offered to depend on your credit profile, avoid multiple applications that add credit enquiries, compare loans on the comparison rate and fees, and borrow only what you need.

A personal loan can be a useful way to fund a significant expense, whether that is a car, a home renovation, a medical procedure or consolidating existing debt into a single repayment. But for first-time borrowers, the process can feel unfamiliar. Five things are worth understanding before you apply.

What lenders usually ask for

Requirements vary by lender, but most will want to see that you are:

• at least 18
• an Australian citizen or permanent resident, although some lenders consider certain visa holders
• earning a regular income you can document

You’ll usually need photo ID, recent payslips or tax returns, bank statements, and details of your expenses, debts and credit cards. Lenders check your credit file and assess whether you can afford the repayments without hardship.

1. Secured and unsecured loans work differently

Personal loans come in two main forms. A secured loan is backed by an asset, most commonly a vehicle, which the lender can repossess if you default on repayments. Because the lender has that security, interest rates on secured loans can be lower. An unsecured loan requires no asset as security but typically carries a higher interest rate to reflect the greater risk to the lender.

Knowing which type suits your situation is a useful starting point before you begin comparing products.

If you’re buying a car, a secured car loan may offer a lower rate than an unsecured loan, depending on the vehicle and lender.

2. The advertised rate and the rate you are offered may differ

Lenders advertise their most competitive interest rates, which are typically reserved for borrowers with strong credit histories and stable incomes. The rate you are offered will depend on your individual financial profile.

If your credit history is limited or you have had some past issues, the rate offered may be higher than the headline figure. Understanding this before you apply helps set realistic expectations and makes it easier to compare what different lenders are offering you rather than what they advertise.

Many lenders use risk-based pricing, which means they show an advertised range, such as a “from” rate. Your credit score, income stability and existing debts decide where in that range you land.

3. Every application leaves a mark on your credit file

Each time you apply for credit, the lender conducts a credit enquiry that is recorded on your credit file. Multiple enquiries in a short period can signal to lenders that you are under financial pressure or shopping desperately for credit, which can work against you.

Rather than applying to several lenders at once to see who approves you, do your research and compare options before submitting a formal application. A finance broker can help you compare your options. Some lenders also offer a rate estimate that doesn’t affect your credit score, so ask before you apply.

4. Fees matter as much as the interest rate

The interest rate is not the only cost attached to a personal loan. Establishment fees, monthly account-keeping fees and early repayment charges can add meaningfully to the total cost over the life of the loan.

The comparison rate, which lenders are required to display alongside the advertised rate, factors in most fees and gives a more accurate picture of what the loan will cost. Comparing products on the comparison rate rather than the headline rate is a more reliable way to assess the true cost.

Check, too, whether you can make extra repayments or pay the loan off early without a fee. That flexibility matters if you expect a bonus or tax refund during the loan term.

5. Borrow what you need, not the maximum you can get

Lenders will assess how much you can borrow based on your income, expenses and existing debts, but that figure is not a target. Borrowing more than you need increases your repayments, extends the time you are carrying debt and increases the total interest paid over the loan term.

Being clear about the amount you need before you apply, and sticking to it, is a simple discipline that makes the loan easier to manage. A personal loan you take now also counts against your borrowing capacity if you apply for a home loan later. Our guide to what affects your borrowing capacity besides income explains how.

Is a personal loan the right choice?

Personal loans suit one-off costs with a clear amount and a plan to repay. For a balanced look, read the pros and cons of personal loans. If you’re thinking about combining existing debts, read 5 things to know before consolidating your debt and the benefits of debt consolidation, and if you’re weighing a personal loan against buy now, pay later, read three things to know about buy now, pay later.

A finance broker can help you compare your options across a range of personal loan products and lenders, so you have a clear picture of what is available before you commit. If you’re consolidating, a debt consolidation loan is another option to compare. Attain Loans is a finance broker in Melbourne’s west that compares personal and car loans across its lender panel, subject to each lender’s assessment.

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Consider whether it’s appropriate for you and speak with a licensed professional before making a decision.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.