How a risk-based personal loan could benefit you

Ever heard of risk-based pricing or personalised interest rates? Well, if you’re on the hunt for a personal loan it may be something to get familiar with.

Risk-based pricing refers to the interest rate that a bank or lender offers a customer, based on their credit rating. And it’s becoming more popular among Aussie personal loan lenders. 

“It’s really taken off in the last 10 years or so,” Mozo Banking Expert, Peter Marshall says.

“It used to be quite rare but as more and more information is getting put on people’s credit files, more lenders have decided to use that deeper information to inform their pricing, so it has become a lot more common now.” 

How does risk-based pricing work? 

As the name indicates, risk based pricing is calculated based on how much risk the potential borrower poses to the lender. 

David Norman, chief operations officer of online personal loan lender NOW FINANCE, explains that with risk-based pricing, customers receive an interest rate that is tailored to their credit and financial situation. This is instead of the traditional “one-size-fits-all” lending model where there is a single advertised interest rate which everyone gets.

“Lenders calculate personalised interest rates algorithmically, taking into consideration a customer’s unique circumstances,” he says.

“At NOW FINANCE, we have built a proprietary machine-learning pricing engine that uses a person’s credit score, postcode, and employment and residential statuses to determine their guaranteed personalised rate.”

Instead of having a settled interest rate, risk-based personal loans products are advertised with a minimum and maximum loan rate. The lender can offer borrowers any rate between those two numbers, based on a customer’s data.  

Simply put, if the lender views a borrower as “low-risk” they offer them the lower rate. However, if a customer falls on the other side of the fence and is deemed “high-risk”, by having a lower credit rating, the lender offers the higher interest rate. 

But risk-based pricing isn’t only beneficial to people with good credit history

While it might seem that these types of personal loan products are designed just to benefit customers with excellent credit, this is actually not the case. 

“There’s also a benefit to borrowers that might have a low credit rating, because a lot of lenders who offer a single rate may have tighter criteria about who they will give that rate to,” Peter Marshall says. 

“Borrowers with a low credit rating might find themselves locked out of some lenders based on that criteria.” 

Marshall explains that these loans provide particular consumers with an opportunity to borrow who otherwise may not have been eligible. Risk-based loans are also a good way for customers to rebuild their credit rating if it isn't looking healthy at the moment. Or they can help a particular customer establish a credit history if they haven’t done much or any borrowing before. 

“Having the option, even if it is at a higher cost, to borrow money can actually help to rebuild your credit rating. Just as long as you can pay your loan back over time and meet all of your repayments on time,” Marshall says. 

“Say you take out a personal loan now, and you have a not-so-good credit rating, you can use that as an opportunity to rebuild your credit rating. It will help you when you want to borrow more money for something like a home loan because you are more likely to qualify for a loan.” 

Marshall also stated that most of these risked-based loans have variable rates. He says that for customers that do end up on a higher interest rate, they should initially try and make extra repayments to pay off the loan quicker. Not only will this go towards building up your credit rating but it will also mean that you’ll end up paying less in interest. 

Want to compare some killer personal loan options? Take a look at the table below or jump over to our personal loan comparison tool.

Compare Personal Loans 2021 - last updated 21 May 2022

Search promoted personal loans below or do a full Mozo database search. Advertiser disclosure
  • Unsecured Personal Loan


    interest rate
    comparison rate
    Monthly repayment
    5.35% 19.09% p.a.
    6.14% 19.99% p.a.based on $30,000
    over 5 years

    Fast, easy and 100% online, this is a low cost loan with no ongoing fees or extra repayment penalties. It's perfect for savvy borrowers with great credit. If you’re over 18 and earn above $30,000, you could qualify (other eligibility criteria may apply).

    Repayment terms from 3 years to 7 years. Representative example: a 5 year $30,000 loan at 5.35% would cost $34,832.61 including fees.

  • Home Improvement Loan

    Fixed, Unsecured

    interest rate
    comparison rate
    Monthly repayment
    5.75% p.a.
    5.96% p.a.based on $30,000
    over 5 years

    Handypay offers flexible home improvement loans for Excellent Credit or better. Handypay is a specialist home improvement plan provider and offers loans up to $75,000.

    Repayment terms from 1 year to 7 years. Representative example: a 5 year $30,000 loan at 5.75% would cost $34,840.18 including fees.

  • Personal Loan


    interest rate
    comparison rate
    Monthly repayment
    5.75% 25.99% p.a.
    6.68% 29.2% p.a.based on $30,000
    over 5 years

    Repayment terms from 2 years to 7 years. Representative example: a 5 year $30,000 loan at 5.75% would cost $35,370.18 including fees.


Your risked-based pricing questions answered...

  • What is risk-based pricing? 

Risk-based pricing refers to a model where a lender offers a customer a personalised interest rate based on their credit score. Those with excellent credit are offered the lowest rate while those with poor credit may receive the highest rate. 

  • Why is risk-based pricing important?

Risk-based pricing can be beneficial to both the consumer and the lender. From the lender's perspective it protects them from losing money on risky borrowers. When it comes to the consumer, it benefits those with healthy credit as they are offered low rates. However, it can also benefit those with bad credit as it gives them a chance to borrow, which may not be available on loans that don't offer this pricing model. It can also be an opportunity for customers with a poor credit rating to improve it, by paying back the loan on time. 

  • Do all personal loans offer risk-based pricing?

No, not all personal loans offer risked based pricing but it is becoming increasingly common amongst Aussie lenders. An indicator that a lender offers personalised interest rates is that they'll advertise the rate between two figures e.g. rates from "6.00% to 16.00%." Lenders that don't offer risk-based pricing will advertise a single rate.

  • What is a good interest rate on a personal loan? 

Right now on the Mozo database, the average unsecured personal loan rate sits at 10.26% and the average secured personal loan rate sits at 7.96%. So any rate below these numbers is a pretty good deal. Just remember, to be eligible for the low rates offered by risk-based personal loans, you must have a good credit rating. 

  • How can I improve my credit score?

There are many ways to improve your credit score. The most important thing to focus on is your current debt and how you are repaying it. If you are missing repayments often, find a way to make sure you aren't doing it. This may mean refinancing your home loan, taking out a debt consolidation loan or applying for a balance transfer credit card to help clear your existing debt. For a full rundown of other tips check out our comprehensive guide: How to improve your credit score

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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