What is a personal loan and why might you decide to get one?

A personal loan is credit you borrow to pay for something when you don’t have the money upfront to pay for an expense in full.

You might use a personal loan if your upcoming vacation or highly anticipated wedding could use a little more funding, for example. Or maybe, your car has broken down and you need a new one asap.

Having access to a personal loan can be quite a useful undertaking if you’re in a bit of a pinch. But keep in mind that when repaying a personal loan, interest is usually added on top of the borrowed amount. 

To make repaying the loan financially manageable, lenders offer a range of loan terms, typically between 1-5 years. 

So, if you think a personal loan is something you’ll want to apply for to help you cover an upcoming expense, let’s get into it.

A step-by-step process of getting a personal loan

A personal loan can be obtained from personal loan providers like a bank or a lender, and the process can be relatively straightforward. For instance, you might:

Step 1: Consider how much money you’ll need to borrow. Then plug that figure into a personal loan repayment calculator. This will give you an estimate of your monthly repayment amounts, including any potential interest payable. 

By crunching the numbers, you’ll be able to work out whether taking out a loan is feasible for you, or if some adjustment in the loan amount is needed to meet your budget.

Step 2: Compare loans and lenders

Now, it’s time to work out which personal loan will best suit your needs.

When choosing a personal loan, you’ll want to look at the interest rate and fees of the loan as these will determine what your repayments will be for the duration of the loan. Some lenders will also have an application fee which you might need to factor into the upfront costs. But there might also be others depending on the lender, so be sure you review these in advance.

All personal loans advertised are required to include a comparison rate in addition to the headline interest rate. The comparison rate is essentially a combination of the interest rate, fees, and charges you’ll be paying on a loan and is there to help you compare loans between providers.

Step 3: Prepare your documents. Once you have selected the lender and loan you’d like to apply for, it’s a good idea to get together the required documentation. Your lender might request some information about your finances, and may ask you to provide things like your:

• Personal details
• Credit score
• Employment status
• Assets
• Any outstanding debts 
• Expenses.

Lenders ask this to ensure you’ll be able to afford to pay back your loan, and that your debt won’t be unmanageable if your application is approved. 

Pro tip: If you’re strapped for time, having your documents ready for submission could potentially speed up the process a bit. 

Step 4: Apply for a personal loan. Many lenders will offer you the choice of applying for your loan online and depending on the lender, the application process could take as little as 15 minutes to complete. 

The waiting times for loan approval will vary based on your circumstances and the lender. But if your application is approved, with some online lenders it’s possible that you’ll receive the funds within hours, but you could need to wait up to 7 business days.

Factors that may affect approval for a personal loan 

Before applying for a loan, you’ll probably want to check whether any restrictions apply to you.

For instance, if the loan amount you’re looking to borrow exceeds what you can reasonably be expected to pay back with your income, your application may not be approved.

Additionally, it’s possible that your credit score could impact the outcome of your loan or the interest rate that you are offered. If you’re worried about your rating, there are ways you can improve your credit score before applying.

As every bank and lender is different, it’s always best to check what your lender’s requirements are for loan approval prior to making an application. 

Types of personal loans

When looking for a personal loan, there are a few types that you might come across. Here are two common ones:

Secured loan. It’s when you use assets (like your home, for instance) as collateral against your loan. This option usually allows you to take out a bigger loan amount. However, it’s important to note that if you default on your secured loan, your lender may seize these assets.

Unsecured loan. While you don’t necessarily have to put up an asset as collateral, your interest rate is likely higher. This is because the lender is taking on more risk for monetary loss. If you don’t make repayments, the lender may also take you to court for the money you owe.

With that being said, you might be wondering how to decide on an interest rate type. Let’s have a look.

Interest rates of a personal loan

Choosing an interest rate for your personal loan can impact how much you pay. There are two common options you’ll typically find. 

1. Fixed interest rate. This allows you to pay the same amount of interest over the life of your loan. You might find this helpful if planning a predictable budget is something you’re after. Although, there is usually a break fee if you decide to pay off your loan early.

1. Variable interest rate. The interest you pay can fluctuate over the life of your loan. This means your repayment amount can sometimes be higher or lower than what you might pay with a fixed interest rate. There are also no early exit fees.

As everyone’s situation looks different, consider what’ll work best for you. Taking out a low-rate personal loan is a big decision and it’s important to do your research beforehand.

Compare your personal loan options

If you’re finding it difficult to choose a personal loan with all the possibilities out there, we’ve made the process a little bit easier for you. You can start comparing some options below or check out the roundup of the best personal loans selected by our money experts.