Alan Hartstein
Beth Buczynski 
A personal loan lets you borrow money for any purpose. It can help pay for a holiday, a car, renovations, debt consolidation and everything in between. There are many types of personal loans to choose from, with varying interest rates, fees and term lengths.
To help you better understand your options, we’ve compiled a list to help you sort through common loan types in Australia.
Loans in Australia
In general, a loan is a way to finance a purchase or investment when you don’t have — or don’t want to use — cash. Each type of loan has its own particular set of providers, qualification criteria, acceptable use, and benefits and risks.
Common loan characteristics
Across types, there are some common characteristics you’ll encounter when shopping for a loan in Australia. These include a potential requirement for collateral and the type of interest rate offered.
- Secured loan: Requires the borrower to provide an asset to act as collateral.
- Unsecured loan: Does not require the borrower to provide collateral.
- Fixed-rate loan: The interest does not change for a set amount of time.
- Variable-rate loan: The interest rate may rise or fall over the course of the loan term.
Types of personal loans in Australia
Personal line of credit
A line of credit is a facility banks offer that allows the borrower to dip into whenever they need cash, like a credit card, up to an agreed upon limit. Unlike a standard personal loan, which is handed over as a lump sum to use on a specific good or service, you can use a line of credit whenever you need cash.
Pros: A line of credit is ideal for someone planning a big event such as a wedding or an overseas holiday without knowing exactly how much they’ll need, as long as the amount available is sufficient to cover these costs. You can also use it to dip into as required.
Cons: There are plenty of fees and charges such as an establishment fee and a monthly account keeping fee, while the interest rate charged may exceed that of a personal loan, depending on your lender.
Overdrafts
An overdraft provides a line of credit, usually up to $2000 but sometimes more, for bank account holders if their balance falls below zero and into the red. Some banks have different names for this facility but they basically work the same way – once you go into debt you are liable for interest repayments and charges as stated in the terms and conditions of your account.
Pros: Overdrafts are a great stop-gap measure if you are waiting for money to lob into your account and you need cash immediately without having to fill out forms and apply for other types of loans.
Cons: Overdrafts can attract high interest rates and lead to a perpetuating cycle of debt if not brought under control, so you should always aim to clear an overdraft as soon as possible.
Debt consolidation loans
Debt consolidation loans can help you manage your personal finances more effectively by centralising your debt into one place. Paying off multiple loans simultaneously can be exhausting, both financially and emotionally. This not only makes repayments easier as you only have one loan to pay off, but may help clear your debt sooner.
Pros: Debt consolidation loans simplify the whole loan/debt process. Your lender pays off the debts you are consolidating, on your behalf. You may also lessen the chances of attracting late fees and charges with only one loan to focus one, and have more control over your budget and monthly cash flow.
Cons: Like all personal loans, debt consolidation loans can include fees and early payment charges, depending on the structure of the loan.
Student start-up loans
Centrelink provides student start-up loans as financial assistance to students already on Youth Allowance, Austudy or ABSTUDY Living Allowance, who may require it for everyday expenses. The loan, which is currently for a fixed amount of $1201, is available to eligible students twice a year. The loan becomes repayable once your income equals or exceeds $48,361.
Pros: Loans are interest free, tax free and don’t become repayable until the student has entered the workforce.
Cons: There are fairly tight eligibility restrictions and these loans are only available to full-time students.
No-interest loans
The federal government and some charity organisations offer no interest loans of up to $5000 for those experiencing financial hardship. Terms and conditions vary between lenders but the loans are generally only available to those earning less than $45,000 per annum and who are on either a Health Care or Pensioner Concession Card, have lived at the same address for three months or longer, or who have recently experienced some form of domestic violence. They also need to provide some evidence that they can repay the loan.
The loans can only be used for essential items such as furniture, appliances, repairs to a car or medical bills and some lenders only offer loans up to a maximum of $2000.
Pros: No-interest loans provide much-needed relief to those who may not be able to obtain urgently needed money from any other source.
Cons: Eligibility is highly restricted and the amount available to each borrower is relatively small.
Guarantor loans
A guarantor loan is an unsecured personal loan. Someone else, usually a family member, guarantees the loan on your behalf, making them responsible for repayment if you default on the loan.
Pros: Having a guarantor can make it a lot easier to acquire a loan if you don’t have any assets to put up for security, or a good credit history. Some lenders may also offer you a lower interest rate if you have a guarantor.
Cons: If you consistently miss repayments your lender may come after the guarantor and potentially sell the asset you put up as collateral to get their money back.
Other types of personal loans, to use with caution
Buy now, pay later loans
Buy now, pay later loans, or BNPL, allow you to borrow money to buy a product or service and repay the amount in instalments over a period of weeks or months. These instalments start after you pay an initial deposit, usually 25% of the purchase cost. BNPL services are offered at participating retailers, and payments are usually deducted automatically from your bank account or credit card.
Major banks and high-profile providers, such as CBA, Afterpay, Zip Pay and LatitudePay all have some type of BNPL offering.
Pros: BNPL loans are relatively easy to get and do not accumulate interest like credit cards. They also allow the consumer to purchase something immediately that they might otherwise not be able to.
Cons: These loans may not be subject to interest, but they do come with fees, such as monthly fees, processing fees, set up fees and late fees. In 2020, ASIC found that one in five BNPL customers missed their bill repayments.
Cash loans
Cash loans are typically small and have short term lengths. A range of providers, such as Cash Converters, MoneySpot and MoneyMe, offer cash loans between $500 and $20,000 for periods ranging from 30 days to five years, depending on the amount you borrow.
Lenders usually require either 90 days of bank statements or at least two payslips before approving a cash loan.
Pros: Cash loans are sometimes approved immediately, so you can get funds quickly.
Cons: The interest rates can be extremely high – 4% a month. That equates to 48% per annum, which is quite a bit higher than what some other types of personal loans might offer. There are also late penalties and in some cases charges for early repayment.
Credit card cash advance
A credit card cash advance is a way to withdraw cash from your account, either at an ATM or bank branch. Cash advances also apply to balance transfers to another account, or transferring money off your card to a gaming account, for example.
Pros: Cash advances may be useful in a financial emergency as you can simply withdraw the money at an ATM or bank branch or transfer the money online to another linked account and withdraw it with your savings account card.
Cons: Cash advances are expensive – you may pay a 3% fee on the transaction amount every time you get an advance, usually up to a maximum of $300. Plus, interest, which can be 20% or higher, is calculated daily. In other words if you don’t stay on top of your debt it can quickly spiral out of control.
Low-doc loans
Low-doc, or low-documentation personal loans, are designed for people that may not have the same documentation that lenders generally require. This could be due to factors such as: they are contractors, self-employed, small business owners or may have recently returned from overseas or just been released from prison.
In these instances, a lender will still require some documentation but not a history of employment and pay slips, for example.
Pros: Low-doc loans are ideal for would-be borrowers that may otherwise struggle to obtain a loan.
Cons: The nature of these loans makes them riskier for the lender so they are usually accompanied by higher interest rates and charges.
Pawnshop loans
Apart from buying goods off customers, pawn brokers provide loans in exchange for an asset such as jewellery or a laptop over a period of anything up to two years. In other words, a borrower comes into a shop and provides an item as surety for the loan, which they get back once the loan is repaid, like a cash advance.
Terms and conditions vary widely between providers and some offer a rolling type of contract where the borrower pays off a monthly amount and the loan goes on indefinitely, whereas others require full repayment within a month or even less.
Pros: Pawn broker loans are basically there for people who need cash urgently and can’t get it from anywhere else.
Cons: The interest rates are shockingly high and may also be accompanied by excessive fees and charges.
Payday loans
A payday loan allows you to borrow anything from $200 to $10,000 which is then repaid over a period from 16 days up to 12 months. Payday loans, as the name suggests, are short-term forms of credit and are targeted at people who may struggle to get a loan from a conventional lender due to a poor credit history. Payday loans are generally approved on the proviso that the person will obtain the money shortly after the money is handed out and repay it in full.
Pros: Payday loans provide a source of cash for people requiring funds urgently.
Cons: Interest rates, fees and charges may be extreme.
Peer-to-peer lender (P2P) loans
Peer-to-peer (P2P) loans allow borrowers to obtain money for a business or personal loan from an investor via a P2P platform. Like other types of personal loans, the borrower pays it back over an agreed-upon period with interest. The platform operator acts as an intermediary between the lender and the borrower.
Investors in P2P platforms can sometimes decide where they want their money to go and for what purpose, as well as determining the interest rate and the period in which they want their money to be loaned.
Pros: Borrowers on P2P platforms can shop around for lower interest rates and fees than they might get elsewhere.
Cons: You may be restricted regarding what you can use the money for if you borrow from a P2P platform.
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