Different Types of Personal Loans You Should Be Aware Of

A personal loan allows you to borrow funds for virtually any purpose. Whether you’re looking to fund a vacation, purchase a vehicle, renovate your home, consolidate debt, or anything else, personal loans can provide the necessary financing.

With a range of loan types available, you’ll find various interest rates, fees, and loan terms to choose from.

To help you navigate your options, we’ve put together a list of common types of personal loans available in Australia.

Understanding Loans in Australia

Generally, a loan serves as a means to finance a purchase or investment when you either don’t have the cash readily available or prefer not to use it. Each loan type comes with its own set of lenders, qualification criteria, allowable uses, as well as associated benefits and risks.

Common Loan Features

When exploring loan options in Australia, you’ll come across several common features, including:

• Secured Loans: These require you to provide an asset as collateral to back the loan.
• Unsecured Loans: These do not require any collateral from the borrower.
• Fixed-Rate Loans: These have an interest rate that remains constant throughout the loan period.
• Variable-Rate Loans: These have an interest rate that can fluctuate during the loan term.

Types of Personal Loans in Australia

Personal Line of Credit A personal line of credit allows you to borrow funds up to an agreed limit, similar to a credit card. Unlike a traditional personal loan, which provides a lump sum for a specific purpose, a line of credit offers flexible access to cash as needed.

• Pros: Ideal for large expenses like weddings or overseas trips where the exact amount needed might be uncertain. It provides ongoing access to funds as required.
• Cons: May come with various fees, such as an establishment fee and monthly account-keeping charges. Interest rates can be higher compared to other personal loans.

Overdrafts An overdraft is a credit facility linked to your bank account, allowing you to withdraw beyond your account balance, often up to $2,000 or more. Different banks may use various names for this service, but the basic concept is similar.

• Pros: Useful for urgent cash needs when waiting for funds to arrive, without the need for a formal loan application.
• Cons: Overdrafts can incur high interest rates and may lead to a cycle of debt if not managed carefully. It’s advisable to clear the overdraft promptly.

Debt Consolidation Loans Debt consolidation loans combine multiple debts into a single loan, making it easier to manage your finances. This approach simplifies your repayments by consolidating them into one loan, potentially helping you pay off your debt faster.

• Pros: Streamlines debt management by having a single loan to focus on, potentially reducing late fees and improving budget control.
• Cons: May involve fees and early repayment charges, depending on the loan’s terms.

Student Start-Up Loans Offered by Centrelink, student start-up loans provide financial support to students receiving Youth Allowance, Austudy, or ABSTUDY Living Allowance. Currently, the loan amount is $1,201 and is available twice a year. Repayment starts once your income reaches $48,361.

• Pros: Interest-free and tax-free, with repayments deferred until the student starts earning.
• Cons: Strict eligibility criteria; available only to full-time students.

No-Interest Loans These loans, provided by the federal government and some charities, offer up to $5,000 to those in financial difficulty. They are typically available to individuals earning less than $45,000 annually and holding a Health Care or Pensioner Concession Card, among other criteria.

• Pros: Provides essential financial relief without interest, helpful for those who have no other options.
• Cons: Eligibility is limited and the loan amount is relatively modest.

Guarantor Loans Guarantor loans involve another person, usually a family member, agreeing to repay the loan if you default. While often associated with home loans, they can also be unsecured personal loans.

• Pros: Easier to obtain with a guarantor, especially if you lack assets or have poor credit. Some lenders may offer lower interest rates with a guarantor.
• Cons: Failure to repay can put the guarantor at risk, potentially affecting their assets.

Other Types of Personal Loans to Use with Caution

Buy Now, Pay Later (BNPL) Loans Buy Now, Pay Later (BNPL) loans allow you to purchase a product or service and repay the amount in instalments over a set period, usually starting after an initial deposit of around 25% of the purchase price. These services are available through participating retailers and often have automatic deductions from your bank account or credit card.

• Pros: BNPL loans are generally easy to access and do not accrue interest like traditional credit cards. They enable you to make immediate purchases that you might otherwise be unable to afford.
• Cons: Despite no interest charges, BNPL loans often come with various fees, including monthly, processing, set-up, and late fees. According to ASIC’s 2020 findings, around 20% of BNPL users missed their repayments.

Cash Loans Cash loans are typically small, short-term loans ranging from $500 to $20,000 with terms from 30 days to five years, depending on the amount borrowed. Lenders usually require recent bank statements or payslips for approval.

• Pros: Cash loans can be approved quickly, providing fast access to funds when needed.
• Cons: These loans often have very high interest rates — up to 4% per month, equating to an annual percentage rate (APR) of 48%. They may also incur late payment penalties and, occasionally, charges for early repayment.

Credit Card Cash Advances A credit card cash advance allows you to withdraw cash from your credit card at an ATM or bank, or transfer funds to another account. This can be useful for immediate cash needs.

• Pros: Cash advances can be a quick solution for financial emergencies, with the ability to access cash via ATM or bank transfer.
• Cons: They come with high fees — typically around 3% of the advance amount, up to a maximum of $300. Additionally, interest rates can exceed 20% and are calculated daily, which can lead to significant debt if not managed carefully.

Low-Doc Loans Low-doc loans are tailored for individuals who may not have traditional documentation, such as contractors, self-employed workers, or recent returnees from overseas. They require less documentation than standard loans.

• Pros: Low-doc loans are useful for those who might struggle to secure traditional loans due to limited documentation.
• Cons: The reduced documentation increases the risk for lenders, which often results in higher interest rates and additional charges.

Peer-to-Peer (P2P) Loans

Peer-to-Peer (P2P) loans provide borrowers with the opportunity to secure funds for personal or business purposes from individual investors through a P2P platform. Similar to other personal loans, borrowers repay the amount over a specified period with interest. The platform operator facilitates the connection between the lender and the borrower.

Investors using P2P platforms often have the option to choose where their funds are allocated and for what purpose. They can also set the interest rates and the loan duration for their investments.

• Pros: Borrowers on P2P platforms may find lower interest rates and fees compared to traditional loan sources.
• Cons: There might be limitations on how the borrowed funds can be used when obtained through a P2P platform.

Payday Loans

A payday loan allows you to borrow between $200 and $10,000, with repayment periods ranging from 16 days to 12 months. As the name suggests, payday loans are short-term credit solutions designed for individuals who may struggle to secure a loan from traditional lenders due to poor credit history. These loans are generally approved under the condition that the borrower will receive funds shortly after approval and repay the full amount by the next payday.

• Pros: Payday loans offer a quick source of funds for those in urgent need of money.
• Cons: They often come with extremely high interest rates, fees, and charges.

Pawn Shop Loans

Pawn shop loans provide a way to borrow money by using a valuable item, such as jewelry or electronics, as collateral. Borrowers bring their item to a pawn shop, which then offers a loan based on the item’s value. The borrower receives the loan and can retrieve their item once the loan is repaid. These loans typically have a term of up to two years.

The terms and conditions can vary significantly among pawn shops. Some offer ongoing agreements where the borrower makes monthly payments and the loan term continues indefinitely, while others require full repayment within a month or less.

• Pros: Pawn shop loans are ideal for those who need immediate cash and cannot obtain it through other means.
• Cons: They often come with exorbitant interest rates, along with additional fees and charges.