Personal Loans Explained: When They Make Sense and When They Don’t
When unexpected expenses arise or big life goals need funding, many Australians consider taking out a personal loan. From consolidating debts to paying for a car or funding a renovation, personal loans can offer flexibility and quick access to money.
But like any financial product, they’re not suitable in every situation. Sometimes a personal loan can be a smart way to manage cash flow or reduce interest costs, while in other cases it can add more financial pressure.
In this guide, we’ll take a balanced look at personal loans:
What they are and how they work.
Common reasons people use them.
When they may make sense.
When they may not be the best option.
Alternatives to consider.
The process of applying for a personal loan.
By the end, you’ll have a clear understanding of whether a personal loan is worth exploring for your circumstances. (Note: This article is general in nature and does not take into account your personal financial situation. Always seek professional advice before making borrowing decisions.)
What is a Personal Loan?
A personal loan is a type of credit that allows you to borrow a fixed amount of money from a bank, credit union, or non-bank lender and repay it over a set period of time, typically one to seven years.
Personal loans come in two main forms:
Secured Personal Loan
Backed by an asset, such as a car or savings account.
Because the lender has security, the interest rate is usually lower.
Risk: if you don’t repay, the lender may repossess the asset.
Unsecured Personal Loan
Not tied to an asset.
Higher risk for the lender, which often means higher interest rates.
More flexible, but usually with stricter eligibility checks.
Other key features include:
Fixed vs variable interest rates (certainty vs flexibility).
Loan amounts (typically $2,000 to $50,000, though some lenders go higher).
Repayment frequency (weekly, fortnightly, or monthly).
Fees (application, monthly service, early repayment).
Common Uses of Personal Loans
Australians use personal loans for a wide variety of purposes. Some of the most common include:
1. Debt Consolidation
Combining multiple high-interest debts (credit cards, store cards, payday loans) into one repayment.
Aim: lower overall interest and simplify repayments.
2. Car Purchase
Many borrowers choose a personal loan to finance a new or used vehicle.
Alternative to dealership finance, sometimes with more flexibility.
3. Home Renovations
Ideal for small to medium-scale projects where refinancing a mortgage may not make sense.
E.g., kitchen upgrade, bathroom remodel, landscaping.
4. Medical or Dental Expenses
For elective surgeries, orthodontics, or urgent health needs not fully covered by insurance.
5. Weddings and Major Life Events
Covering big once-off costs where savings aren’t enough.
6. Travel
Some people fund holidays with personal loans. While it can offer flexibility, it should be carefully considered given there’s no asset created.
The Pros of Personal Loans
Personal loans can be a useful tool when used strategically. Here are some of the advantages:
1. Predictable Repayments
Fixed terms mean you know exactly how much you need to repay and when the loan will end.
2. Debt Simplification
Particularly in debt consolidation, one repayment can be easier to manage than multiple credit card bills.
3. Potential Interest Savings
Personal loans often have lower interest rates than credit cards.
Example: a credit card at 19% vs a personal loan at 10% could mean significant savings. (Illustration only — actual rates vary).
4. Flexible Use
Unlike car loans or mortgages, personal loans can be used for almost any purpose.
5. Faster Access to Funds
Many lenders approve and release funds within days, sometimes even 24–48 hours.
When Personal Loans Make Sense
There are several scenarios where a personal loan may be worth considering.
1. Consolidating High-Interest Debt
If you’re paying 18–20% on credit cards and can move that balance into a personal loan at 9–12%, the savings can be substantial. It can also provide psychological relief by shifting from open-ended debt to a structured repayment plan.
2. Financing a Necessary Asset
When you need a car for work or family, but don’t have enough savings, a personal loan can provide a solution. Using a secured loan with the car as collateral may lower the rate.
3. Covering Urgent, Essential Costs
Medical expenses, emergency repairs, or other unavoidable costs can sometimes justify taking out a personal loan, especially if it avoids using high-cost payday lenders.
4. Short-Term Gap Financing
If you’re waiting on funds (such as a tax refund, inheritance, or property sale) and need money in the meantime, a personal loan can bridge the gap. The key is ensuring the repayment plan matches your incoming funds.
5. Managing Large Planned Purchases
For renovations, weddings, or other major life events, personal loans can spread out the cost, making it more manageable without dipping into emergency savings.
Thinking about a personal loan for debt consolidation, a car, or renovations? Let’s find the right option for you.
When Personal Loans Don’t Make Sense
While personal loans can be helpful, there are times when they may not be the best option. Borrowing money always comes with responsibility, and in certain scenarios, the costs can outweigh the benefits.
1. For Non-Essential Spending
Using a personal loan to fund luxury purchases or holidays can create debt without adding long-term value. Unlike borrowing for an asset (like a car or home), this type of spending leaves you with repayments but nothing tangible in return.
2. If the Interest Rate Isn’t an Improvement
If the loan’s rate isn’t lower than your existing debts or the fees cancel out the benefits, consolidating may not actually save you money. Always compare the true cost, not just the advertised rate.
3. When You’re Already Struggling with Repayments
If your income isn’t steady or you’re having trouble paying current debts, taking on more credit may worsen the problem. In some cases, financial counselling or alternative arrangements with creditors might be more suitable.
4. For Long-Term or Ongoing Costs
Personal loans are structured for short to medium terms. Using them for expenses that will keep recurring like school fees or ongoing bills can trap you in a cycle of constantly re-borrowing.
Common Pitfalls to Avoid
1. Focusing Only on the Interest Rate
Fees (application, ongoing, early exit) can add up. Look at the comparison rate, which includes most costs.
2. Borrowing More Than You Need
It can be tempting to accept the maximum approval amount, but higher borrowing = higher repayments and interest over time.
3. Not Reading the Fine Print
Some loans restrict extra repayments or have penalties for paying out early.
4. Overlooking Credit Impact
Applying for multiple loans within a short time can negatively affect your credit score.
5. Relying on “Quick Fix” Lenders
Payday loans and high-fee lenders may advertise speed, but often come with very high costs.
Alternatives to Personal Loans
Before committing, it’s worth considering other options:
Credit Card Balance Transfer – Can work for consolidating small debts if you qualify for a low or 0% introductory rate.
Redraw Facility on a Home Loan – If you’ve made extra repayments, redrawing may be cheaper than a personal loan.
Refinancing Your Mortgage – For larger expenses, refinancing may provide lower rates, though it extends debt over a longer term.
Savings Plan – If the purchase isn’t urgent, saving over time avoids paying interest altogether.
Line of Credit or Overdraft – Flexible options for short-term cash flow needs, usually linked to a home loan or business account.
The Personal Loan Application Process
If you decide a personal loan is worth exploring, here’s how the process typically works:
1. Assess Your Needs
Decide how much you need and for what purpose. Borrow only what’s necessary.
2. Compare Lenders
Banks, credit unions, and non-bank lenders all offer personal loans. Rates, features, and eligibility vary.
3. Check Eligibility
Most lenders require proof of income, stable employment, and a reasonable credit history.
4. Gather Documents
Payslips, bank statements, identification, and details of your existing debts.
5. Submit Application
Apply online, in branch, or through a broker who can compare options for you.
6. Credit Check and Assessment
The lender reviews your credit file and financial situation to ensure the loan is suitable.
7. Approval and Funding
If approved, funds are usually available within a few days. Repayments begin shortly after.
Conclusion
Personal loans can be a useful financial tool—whether for consolidating high-interest debts, funding necessary purchases, or managing short-term expenses. They provide structure, certainty, and in many cases, a lower-cost alternative to credit cards.
However, they’re not the right fit for every situation. Using them for discretionary spending, taking on more debt than you can manage, or overlooking fees can cause problems down the track. The key is to approach personal loans with a clear plan and an understanding of the total cost.
If you’re unsure whether a personal loan is right for you, it may help to speak with a broker who can explain your options, compare lenders, and help you avoid common pitfalls.
Personal loans can be useful, but only when structured correctly. Book your no obligation 10-minute loan check today and explore what’s available for your situation.
This article provides general information only and does not take into account your objectives, financial situation, or needs. You should consider whether the information is appropriate for your circumstances and seek independent advice before making any financial decisions. Terms, conditions, fees, and lending criteria apply to all loan products.