In Australia, personal loans are a common financial tool used for everything from consolidating debt to covering medical expenses or funding major life events. But the decision to borrow money isn’t purely financial. There are emotional triggers, behavioural patterns and psychological biases that all influence how and why people choose to take out loans. Understanding these can help you make more informed decisions.
Are personal loans a good idea?
The answer depends on your financial goals, discipline and mindset. Used wisely, they can help you manage larger expenses or reduce high-interest debt. Used impulsively, they can add to financial stress.
Why do people get personal loans?
Money decisions often involve more emotion than logic. For some, borrowing is tied to a sense of relief, being able to resolve an immediate financial concern. For others, it’s about aspiration, the desire to renovate, travel or give a loved one something meaningful.
Common emotional triggers include:
- Stress over unpaid bills or urgent expenses
- A sense of urgency or pressure to act quickly
- The need to feel in control during financially uncertain times
- The desire to keep up with lifestyle expectations
This helps explain why people get personal loans, even when they may not be the most cost-effective option. It also highlights the importance of slowing down and checking whether the loan supports your longer-term financial goals.
Cognitive biases that affect loan decisions
Behavioural economists have identified several common thought patterns that influence how people borrow. These include:
Present bias
People tend to value immediate rewards more than future ones. This can lead to choosing a loan that offers fast access to funds, even if it comes with higher interest or less flexible terms.
Optimism bias
Borrowers often overestimate their ability to repay a loan quickly, underestimating the strain it might place on their regular expenses.
Anchoring
When borrowers see an advertised interest rate, they may use it as a mental reference point, even if their final rate is higher due to personal circumstances.
The impact of loan structure on behaviour
The structure of a loan affects how people interact with it. For example, loans with fixed repayment schedules tend to support better budgeting. Variable rate loans may offer initial savings but create uncertainty in planning.
Understanding the difference between secured and unsecured personal loans is also important. Secured loans often offer lower rates but require an asset such as a car as collateral. Unsecured loans may be more accessible for some borrowers and quicker to process.
When comparing lenders, focus on the comparison rate to get a clearer view of the total cost.
A mindful approach to borrowing
Being mindful means taking a moment to assess whether the loan fits into your broader financial picture. If you are asking yourself, “Why take out a personal loan?” The answer should be linked to a specific, planned purpose.
Before applying for a loan, consider the following:
- What is the real purpose of this loan?
- Have I explored other options, like a balance transfer or payment plan?
- Can I realistically manage the repayments?
Using tools like an personal loan eligibility calculator can help you make an informed choice based on your financial profile.
Habits of smart borrowers
Borrowers who manage their loans effectively tend to:
- Compare not just interest rates but repayment terms and total cost.
- Use a personal loan repayment calculator to test various scenarios.
- Understand how their credit score influences approval and rates.
- Avoid borrowing more than needed, even if eligible for a higher amount.
- Read the FAQs or independent reviews to understand the lender’s process and policies.
Explore your financial options at NOW Finance
So, are personal loans a good idea? In the right circumstances, they can be. A personal loan can support important financial goals, help cover essential costs or make repayment structures easier to manage. But like any financial decision, it’s important to borrow with a plan and clear intention.
At NOW Finance, we offer no-fee, fixed-rate personal loans with a transparent application process and flexible repayment terms. With recognition from the Mozo Experts Choice Awards and a focus on helping borrowers make confident financial choices, we aim to support your goals. You can learn why customers choose us or start with a personalised quote that won’t affect your credit score.
Disclaimer: This article contains factual information only and does not constitute financial advice, a recommendation, or an offer of any kind. It has been prepared without considering your personal objectives, financial situation, or needs. Before taking any action, you should assess whether the information provided is appropriate for your circumstances. If this article discusses the acquisition or potential acquisition of a specific credit product, you should obtain and review the relevant disclosure documents before applying. The information is believed to be accurate as at the date of publication; however, changes in circumstances after this date may affect its accuracy.
