How Do Personal Loans Work?

If you're like the millions of Australians who currently have or are considering taking out a personal loan, you might be wondering just how they work.

Most people get personal loans to help cover unexpected expenses or large purchases that don't fall into the category of what most banks consider a traditional loan (such as mortgages). These loans can be taken out for any purpose and can be secured or unsecured, depending on your finances and personal situation.

Before taking out a personal loan, it's important to do your research so you know exactly what to expect. So, if you're wondering, "What is a personal loan and how does it work?" Here's our complete overview of everything you need to know about this type of financing.

What is a personal loan and how does it differ from other types of loans?

Personal loans come in two basic varieties: secured and unsecured.

While secured loans require assets such as a home or car, to be put up against the risk of defaulting on the loan, they also have lower interest rates and are much easier to take out. 

An unsecured loan, on the other hand, requires no collateral. However, it is important to be aware of the fact that most unsecured personal loans come with higher interest rates. A loan’s interest rate is another important loan term to be aware of. 

A fixed-rate loan is a type of personal loan that offers a fixed interest rate through the duration of the repayment period. This is different from a variable rate loan, which sees interest rates change over time as market conditions shift. 

A personal loan is a type of borrowing typically used for larger purchases such as home improvements, vacation, or wedding expenses. It differs from other forms of borrowing in that it offers fixed monthly payments with a set interest rate over a designated period of time. 

These features make it an attractive choice if you're looking to finance anything from short-term expenses to long-term investments. Be sure to do your research and find the right loan provider before making a commitment—personal loans can be valuable tools, but they come with their own set of potentially costly risks and drawbacks if you don't choose wisely!

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    Will a personal loan hurt my credit score?

    Taking out a personal loan can affect your credit score. Once you decide to apply for a loan, your credit history and credit score will be reviewed by the lender to help determine whether or not you are approved for the loan. Making too many credit-related inquiries can negatively impact your credit score, so it's a good idea to do your research and only apply for loans that you're likely to be approved for. Rest assured obtaining your personal loan rates with Driva has no impact on your credit score.

    Here are three tips to help you decide if a personal loan is right for you:

    1. First of all, make sure you are taking out the personal loan for a wise reason.

    If it will help you better manage existing debt or improve your financial standing in the long run, then the short-term investment may be worth it.

    2. Make sure the loan amount and terms are manageable for your budget.

    It's important to be realistic about your ability to pay back the loan, especially if you want to avoid doing long-term damage to your credit score.

    3. Look for a reputable lender that takes into account your financial situation and doesn't charge unreasonable interest rates or hidden fees.

    There are many lenders offering personal loans, so do your research to find the right one for you.

    Are there any risks associated with taking out a personal loan, and what should you do if you're considering one of these loans?

    It is important to consider the terms and conditions of the loan as well as any potential risks that come with it. How long do you have to repay the loan? How will your payments impact your budget? How much interest and fees are charged? If you're unsure, do your own further research and compare different loans before making any decisions. Additionally, make sure you have a solid understanding of the qualifications required for different personal loans and if the loan is suitable for your situation. 

    If you do decide to move forward with taking out a personal loan, be sure to establish a monthly payment plan to pay it back and keep track of all of your payments so that there are no surprises down the line. Taking out a personal loan should not be taken lightly, but if done properly, it can be incredibly beneficial.

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    How can you use a personal loan, and what are some common reasons people take out these loans?

    Common reasons for taking out a personal loan include consolidating debt, home improvement projects, travel, and special occasions such as weddings. Before you decide to take out a personal loan, it’s important that you understand the terms of the loan and research different lenders to find one offering favourable interest rates and payment options.

    Make sure your chosen lender has positive ratings from previous customers so you have peace of mind knowing that you’re making an informed decision. Don’t forget to discuss with your family how this loan will affect your budget.

    How do you qualify for a personal loan, and what is the process for applying for one?

    Qualifying for a personal loan is easier than you may think. Generally, lenders will assess your credit score, income, and employment history in order to determine if you qualify. If everything checks out, they'll usually provide an offer outlining the terms, rates, and repayment options available to you. 

    Applying for a personal loan is also quite straightforward; some online lenders have simple application forms that you can complete online in minutes - like with Driva! As part of the process, you'll likely be asked to provide proof of income and identification. Once all the information has been submitted and accepted, many lenders can get the money into your bank account within 24 - 48 hours!

    How long do you have to pay off a personal loan?

    The repayment period for a personal loan can vary depending on the terms and conditions of the loan, your personal loan interest rate, as well as your financial situation. Some lenders may offer loans with a repayment period of just a few months, while others may have terms that extend up to several years. It's important to carefully consider your repayment options and find a loan that works best for you, so do some research on different lenders to find the right one for your needs.

    Final thoughts

    Taking out a personal loan can be a smart financial decision if it is used responsibly. Know that you know the different types of personal loans available and how to qualify for one, the next step is finding a lender that takes your unique needs and situation into consideration.

    With Driva our smart loan match feature streamlines the finance search process by comparing your profile against thousands of lender policies - all without jeopardising your credit score. Driva makes it easy to find a personal loan option that's tailored just for you, so you can take back control of your finances and move towards achieving your financial goals today. Calculate your potential savings with our Personal Loan Calculator and find the best loan options tailored to your needs.

    Declan Flaherty

    As the Digital Marketing Manager at Driva you can find Declan during the day transfixed by a flurry of spreadsheets, mar-tech, Slack emojis and graphs all pointing in the right direction and keeping up to date with the latest car finance trends.

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