Personal loan interest rates in Australia, explained

Personal-loan advertising in Australia is a from-rate festival. 'From 6.49 per cent comparison 7.12 per cent' sits beside a stock photo of a clean kitchen. The 6.49 is not a promise. It is the floor of a grid. This guide explains how you climb that grid, what the comparison rate is doing, and how to compare two offers without being hypnotised by the smaller integer.

Risk-based pricing is the default

Unlike a 1980s building society, most personal lenders now price by risk band. Credit score, bureau enquiries, defaults, employment type (PAYG versus casual versus self-employed), existing commitments, and whether there is security all feed a rate. Two applicants at the same lender can be 4 percentage points apart on the same product name.

If you apply at six lenders in two days, the later ones can see the enquiries and treat you as riskier. Shop with research, then apply where the policy fits.

Nominal rate versus comparison rate

The contractual (nominal) rate is what is applied to the reducing balance. The comparison rate is a legislated illustration that includes certain fees on a standard amount and term (for personal loans this is specified in the ad). A loan at 9.0 per cent with a $15 monthly fee can show a comparison rate well above 9. A loan at 10.5 per cent with no monthly fee can be cheaper in the real world on a short term.

Always pair them. Then ignore both long enough to calculate your total repayments on your amount and term, including the establishment fee.

Fixed versus variable personal loans

Many unsecured personal loans are fixed-rate, fixed-term. The repayment does not move. Extra repayments may be allowed; the residual interest recalculates. Variable personal loans exist, particularly some lines of credit, and they behave more like a structured card. Know which you are in. A 'variable personal loan' that can reprice is not the same as a 5-year fixed instalment contract.

Term is a rate in disguise

A 7-year term at a pretty rate can cost more interest than a 3-year term at a slightly higher rate. Lenders know households buy on monthly figure. If you can service the 3-year repayment, that is usually the cheaper life. If you cannot, a longer term is how people stay solvent — just do not call it a bargain.

Fees that act like interest

Establishment fees of $150–$500 on a $5,000 loan are a large percentage. On $40,000 they are a rounding error. Monthly account fees are a tax on small balances. Late fees are a tax on chaos. Broker origination fees should be disclosed; they may be added to the amount you borrow so you pay interest on the fee.

Worked comparison

Loan A: $15,000, 10.0 per cent, 5 years, $0 monthly, $250 establishment. Loan B: $15,000, 8.9 per cent, 5 years, $10 monthly, $0 establishment. B looks cheaper. Add $10 × 60 = $600 in monthly fees. Depending on the amortisation, A can win. Run a calculator. Do not trust the from-rate on B's banner.

How to get a rate that is not a fiction

• Check your credit file first.
• Reduce unused card limits if you can do it without wrecking convenience you actually need.
• Decide secured versus unsecured before you apply, not after a bait-and-switch.
• Use the lender's eligibility tool if they have one.
• Treat the first offer as a quote, not an insult; you can decline.

For context on whether a loan should exist at all, read personal loan versus card. For the home-loan cousin of comparison rates, see comparing home loans. The legal idea is the same: the pretty number is not the contract.

Comparison-rate examples you can steal

A $10,000 loan over 3 years with a $400 establishment fee has a very different comparison rate from a $30,000 loan over 5 years with the same fee. Ads must specify the example. If your amount is smaller than the example, the fee hurts more. Recalculate.

Broker-originated personal loans

Some personal-loan brokers add a fee to the amount financed. That fee earns interest. Ask for the amount you will receive in hand versus the amount you will repay. If those numbers are far apart, you are paying to be introduced.

Rate holds

Unlike some home loans, personal-loan offers can expire quickly. If you need the money in six weeks for a surgery, say so. A rate that dies in 14 days is not a plan.

What to do with three quotes

Line them up by amount in hand, term, nominal rate, comparison rate, monthly fee, extra-repayment rules, and total repayments. Throw out the from-rate column. If a broker fee is financed, add it to amount in hand as a negative. The winner is usually obvious once the banner is gone.

If all three quotes are ugly, you may be looking at a credit-file issue or an unaffordable amount. That is a credit-score conversation, not a 'find a fourth lender with a prettier ad' conversation.

Why your mate got 8 per cent and you got 13

Your mate has a different bureau file, a different employment type, a different amount, and maybe security. They also might be remembering the from-rate, not the rate on the contract. Ask to see statements, or stop comparing. Apply where policy fits, once.

If a lender invites you to 'add a co-borrower' to get the from-rate, remember the co-borrower is on the hook. That is not a rate tip. That is a relationship decision.

Documents to bring, and a last caution

When you sit down with a lender, broker, packager or yard manager, bring three written quotes with comparison rates, the amount you need in hand, and your credit-file PDFs. If they will not look at paper, they are selling speed. Speed is expensive in Australian credit.

Write down the thing you are afraid to ask — the fee, the balloon, the HELP treatment, the break cost — and ask it first, while you still have the nerve. The second conversation is always weaker. If the answer is vague, you do not have an answer.

This desk would rather you delay a week than sign a contract whose comparison rate you cannot explain to a friend. ASIC's MoneySmart remains the public-interest spare brain: use it the night before, not the morning after. And if the product only works on overtime that is not in your contract, it does not work. Buy a smaller thing, or wait. Waiting is still allowed.