Understanding the pros and cons of personal loans

Learn about interest rates, credit requirements, debt consolidation benefits and risks for first-time borrowers.

Every month, millions of Australians face the same dilemma: how to fund a major expense when savings fall short. Whether it’s an unexpected medical bill, urgent car repairs, or that long-planned home renovation, the gap between what you need and what you have can feel overwhelming.

Personal loans have emerged as a popular solution, with Australians collectively borrowing around $2.5 billion each month in fixed-term personal loans. But before you join the 11.3% of Aussies who have obtained a personal loan in the past six months, it’s crucial to understand what you’re signing up for.

With the average personal loan in Australia being $22,643 and average interest rates sitting at 10.74% p.a for unsecured loans, this financial decision could impact your budget for years to come. This guide cuts through the marketing noise to give you the real story about personal loans: the genuine benefits, the hidden risks, and the practical steps to make the right choice for your situation.

What you need to know about personal loans in Australia

Think of a personal loan as borrowing a fixed amount of money that you pay back in regular instalments over a set period, typically one to seven years. Unlike a credit card where you can continuously borrow up to a limit, a personal loan gives you a lump sum upfront with a clear end date.

Here’s how it works in practice: Sarah needs $15,000 for essential home repairs. She applies for a three-year personal loan at 12% interest, resulting in monthly repayments of approximately $498. After 36 months, she’ll have paid back $17,923 total, including $2,923 in interest.

The average interest rate for unsecured personal loans in Australia is 10.74% p.a as of June 2025, but your actual rate depends on factors like your credit score, income stability, and the lender’s assessment. Most Australian lenders offer amounts between $2,000 and $75,000, with unsecured loans being more common despite their typically higher interest rates compared to secured alternatives.

The key difference from other borrowing options is predictability. While credit card rates can fluctuate and minimum payments barely cover interest, personal loans offer fixed monthly amounts that chip away at both principal and interest, guaranteeing you’ll be debt-free by a specific date.

The advantages of personal loans

Build your credit history from the ground up

For first-time borrowers, a well-managed personal loan can become your financial passport to better opportunities. Demonstrating that you can consistently meet loan repayments over a period of time could help to establish a positive repayment history, which could help build your credit score.

Since 2018, Australian banks use Comprehensive Credit Reporting, meaning your good financial behaviour gets recorded alongside any negative marks. Every on-time payment builds evidence that you’re a reliable borrower, potentially qualifying you for better rates on future loans, credit cards, or even your first home mortgage.

Real-world impact: James took out a $10,000 personal loan at age 25 with a limited credit history. By making every payment on time for three years, he improved his credit score from “fair” to “good,” qualifying him for a home loan with an interest rate 0.5% lower than he would have received otherwise. Over a 30-year mortgage, this saved him over $30,000.

However, this only works if you stay disciplined. Even missing just one repayment will be recorded on your credit report and will negatively impact your credit score, so ensure you can afford the repayments before committing.

Turn major expenses into manageable monthly payments

Personal loans excel at transforming large, overwhelming costs into predictable monthly payments that fit your budget. Unlike credit cards where you might pay minimum amounts for years, personal loans have a clear payoff timeline.

Home improvements represent 15.56% of personal loan purposes, followed by holidays (6.84%), medical expenses (4.48%). The structured approach means you know exactly when you’ll be debt-free, rather than potentially carrying a balance indefinitely.

Budget-friendly example: Instead of putting a $20,000 kitchen renovation on a credit card at 20% interest with minimum payments, a five-year personal loan at 11% would cost approximately $435 monthly. The personal loan saves you thousands in interest and guarantees the debt is cleared in five years, not the 15+ years typical with credit card minimums.

This predictability makes budgeting easier and helps prevent the debt from spiralling out of control.

Simplify multiple debts into one manageable payment

If you’re juggling several debts, consolidation can transform chaos into clarity. The average Australian has $24,199 in personal debt, including car loan, personal loan, buy now pay later and credit card debt, often spread across multiple providers with different rates and due dates.

Debt consolidation loans were the most common reason for personal loans, making up 51.92% of applications, and for good reason. Instead of managing four different payments with varying interest rates, you get one fixed monthly payment.

Consolidation in action: Maria had three credit cards totalling $18,000 at rates between 18-22%, plus a $5,000 store finance debt at 24%. Her minimum monthly payments were $890. A five-year personal loan at 13% consolidated everything into one $525 monthly payment, saving her $365 monthly and thousands in long-term interest.

Extended repayment periods mean debt consolidation loans can have longer repayment periods than credit cards, which can lower your monthly payments, making your finances more manageable.

Get funds quickly when time matters

Personal loans are designed for speed, with many lenders offering approvals within 24-48 hours. This responsiveness makes them ideal for urgent situations where delaying isn’t an option.

The streamlined online application process means you can apply from home without visiting branches or dealing with complex paperwork. Since most personal loans are unsecured, you don’t risk losing valuable assets like your home or car if circumstances change.

When speed counts: When Tom’s air conditioning failed during a heatwave with a newborn at home, he needed $8,000 for emergency replacement. A personal loan provided next-day funding, while saving up would have taken months and put his family’s comfort and health at risk.

Access competitive rates without tying up assets

Personal loans often offer better rates than credit cards or buy-now-pay-later services, especially for borrowers with good credit. If your credit score is over 600, chances are you will be able to secure a personal loan interest rate between 5-10% per annum.

The flexibility to use funds for virtually any legitimate purpose means one loan can address multiple needs. Whether it’s medical bills, education costs, or combining a holiday with home improvements, personal loans adapt to your situation.

Many lenders also offer helpful features like penalty-free extra repayments, letting you pay off the loan faster when you have surplus funds, reducing total interest costs.

The disadvantages and risks you should understand

Interest costs add up more than you might expect

While personal loans offer access to needed funds, the interest costs can be substantial. Even competitive rates compound over time, making that borrowed money significantly more expensive than it first appears.

Reality check: Borrowing the Australian average of $22,643 at 10.74% over three years means paying approximately $3,800 in interest charges. That’s like buying a decent used car in interest alone.

The main downside of a consolidated loan is that it usually takes much longer to repay, and that means it may cost more in the long run. Extending a loan term might reduce monthly payments, but dramatically increases total interest paid.

Cost comparison example: A $20,000 loan at 11% interest costs $3,487 in interest over three years, but $6,061 over five years. The longer term nearly doubles your interest costs despite the same rate.

Always examine the comparison rate, which includes fees and charges, to understand the true borrowing cost.

Credit requirements can be barriers for newcomers

There isn’t a minimum credit score for personal loans that Australian lenders agree on, but you’ll generally need a “good” credit rating to qualify for a loan with traditional lenders. First-time borrowers face a catch-22: you need credit history to get good rates, but you need loans to build credit history.

Every application creates a “hard inquiry” on your credit report, temporarily lowering your score. Multiple applications in quick succession compound this effect and signal financial desperation to lenders.

Scores below 510 are likely to attract a higher rate, with the average interest rate for loans with bad credit (0-459 credit score) being 25.25% p.a. At these rates, borrowing becomes expensive and potentially unaffordable.

First-timer strategy: If you’re new to credit, prepare by checking your score first, paying all bills on time for six months, and applying to just one or two lenders rather than shopping around extensively.

Fixed repayments create inflexible commitments

Unlike credit cards where you can reduce payments to minimums during tough times, personal loans demand the same payment every month regardless of your circumstances. This inflexibility can create stress during financial challenges.

Missing payments triggers immediate consequences beyond late fees. Your credit score takes a hit, and defaults remain visible to future lenders for five years, affecting your ability to borrow for everything from cars to homes.

Financial reality: When David lost his job three months into a personal loan, his $450 monthly payment became unmanageable. Despite finding part-time work, he couldn’t reduce the payment and eventually defaulted, damaging his credit for years.

The lesson: ensure you can afford repayments even if your income drops by 20-30%, and contact your lender immediately if problems arise rather than missing payments.

Risk-based pricing means rates vary dramatically

Personal loans use sophisticated risk assessment, meaning the advertised “from” rates often aren’t available to average borrowers. Your final rate depends on credit score, income stability, employment history, and existing debts.

First-time borrowers or those with limited credit history rarely qualify for the best advertised rates. This can make personal loans significantly more expensive than initially expected, sometimes costing more than alternatives you hadn’t previously thought about.

Rate reality: While advertisements might show rates “from 6.99%,” many first-time borrowers receive quotes around 15-20%, dramatically changing the affordability equation and making other options potentially more attractive.

Your personal loan decision framework

Before you apply: The necessary evaluation

Step 1: Assess genuine need Can you realistically save for this expense instead? Sometimes delaying a purchase by 6-12 months while saving can eliminate borrowing costs entirely. Only borrow for truly necessary expenses or time-sensitive opportunities.

Step 2: Calculate total affordability Use this simple rule: your total monthly debt payments (including the new loan) shouldn’t exceed 20% of your after-tax income. Factor in potential income changes or unexpected expenses.

Step 3: Compare alternatives Before committing to a personal loan, explore other options: family assistance, savings acceleration, lower-cost alternatives to your planned purchase, or secured loans if you have suitable assets.

Preparing for success

Credit score preparation: Check your score for free through major credit agencies. Pay all bills on time for at least three months before applying, and avoid applying for other credit simultaneously.

Documentation readiness: Gather recent payslips, bank statements, identification, and proof of address. Complete applications with accurate information to speed up processing and demonstrate reliability.

Shopping strategy: Compare at least three lenders, focusing on comparison rates rather than just interest rates. Use pre-qualification tools where available to gauge approval likelihood without affecting your credit score.

Red flags that should stop you

• You’re borrowing to pay other debts without addressing underlying spending issues
• The monthly payment would stretch your budget uncomfortably
• You’re thinking about the loan primarily for wants rather than needs
• You’ve been rejected by multiple lenders recently
• You’re unsure about your income stability over the loan term

Making personal loans work for you

Personal loans can be powerful financial tools when used thoughtfully. They offer structured repayment, competitive rates for qualified borrowers, and the flexibility to address various financial needs while building credit history.

However, success requires honest self-assessment and careful planning. The combination of interest costs, credit requirements, and inflexible repayments means personal loans work best for borrowers who have stable incomes, clear repayment plans, and genuine needs that justify the costs.

For first-time borrowers, the key is preparation: understand your credit position, shop around intelligently, and ensure the loan serves a clear financial purpose rather than just providing easy access to money.

When managed responsibly, a personal loan can be your first step toward building a strong credit history that opens doors to better financial opportunities in the future. The question isn’t whether personal loans are good or bad, but whether they’re right for your specific situation and goals.

Take time to weigh these pros and cons carefully, seek advice from financial professionals if needed, and remember that the best loan is often the one you don’t need to take at all.

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.