Personal loans are among the most versatile financial products available in Australia. Whatever your goals, there’s usually one to suit the purpose. The challenge? With so many different types of personal loans on offer, determining which one matches your needs isn’t always straightforward.
Choosing the right option can mean the difference between manageable repayments and unnecessary stress. This guide breaks down personal loans down into three key categories:
- By interest rate
- By collateral
- By use case
By the end, you’ll not only know what the different types of personal loans are, but also which might align best with your financial goals.
TL;DR: The different types of personal loans at a glance
Types of personal loans by interest rate
Interest rates sit at the heart of every loan. They determine what you’ll pay back on top of the amount borrowed, so understanding how they work is essential. In Australia, personal loans generally come in two forms: fixed-rate and variable-rate.
Fixed-rate personal loans
A fixed-rate personal loan locks in your interest rate for the entire term, so repayments never change. This certainty makes it easier to plan long-term budgets, especially for larger loans.
Fixed rates can be slightly higher than introductory variable rates, but the trade-off is stability; you know exactly what the loan will cost from day one. Some lenders also apply break costs if you repay early, so it’s worth checking the fine print.
- Pros: Stability and predictability — perfect if you like to budget with certainty.
- Cons: If market rates drop, you won’t benefit from the lower cost of borrowing.
Variable-rate personal loans
A variable-rate personal loan has an interest rate that can change during the loan term, usually in line with market conditions or lender pricing decisions. These loans often start with lower rates than fixed options, which can make them attractive at the outset. The risk is that repayments can rise if rates increase, so they’re better suited to borrowers with some financial buffer who can handle fluctuations.
- Pros: You might enjoy lower repayments if rates fall.
- Cons: If rates climb, so will your repayments, which can strain your budget.
Understanding comparison rates
When evaluating personal loan types, always look at the personal loan comparison rate. Unlike the headline rate, which only reflects the base interest, the comparison rate reveals what you’ll actually pay once establishment fees, account fees and other charges are factored in. It’s the best way to make a like-for-like comparison between different loan products.
Types of personal loans by collateral
Collateral refers to whether an asset backs the loan. In Australia, this generally means choosing between a secured or unsecured personal loan.
Secured personal loans
A secured type of personal loan requires you to offer an asset (most commonly a car, but sometimes property or another valuable item) as collateral. This security reduces the lender’s risk, which is why this loan typically comes with lower interest and higher borrowing limits than unsecured options.
However, the trade-off is that if repayments aren’t made, the lender can repossess the asset. These loans are typically used for larger expenses, such as buying a new vehicle or funding major home improvements.
- Borrowing range — Typically higher amounts (up to $100,000).
- Rates — These are usually lower than unsecured loans because the lender carries less risk.
- Best for — Major purchases or projects where you want access to more funds at a sharper rate.
Unsecured personal loans
With an unsecured loan, no asset is required. The lender assesses factors such as your credit score, income stability and existing financial commitments to determine eligibility.
Because the risk is deemed higher for the lender, unsecured loans usually have smaller borrowing limits and higher rates. The advantage is speed and flexibility, as you don’t need to tie the loan to property, and approval can be simpler for those with strong credit histories.
- Borrowing range — Usually between $10,000 and $50,000.
- Rates — Higher than secured loans, as there’s more risk for the lender.
- Best for — Flexible needs such as consolidating smaller debts, paying for medical expenses or funding a holiday.
Which option suits you?
Both options can be smart depending on your circumstances; the key is weighing up risk, flexibility and your repayment capacity.
- Go secured if you want a larger loan amount or the lowest possible interest rate, and you’re comfortable offering an asset as security.
- Go unsecured if you’d rather keep things simple and don’t want to tie a loan to your car or other property.
Different types of personal loans by use case
Sometimes the best way to think about personal loans is by what you need them for. Here are the most common categories Australians explore:
- Debt consolidation loans — This is used to combine multiple debts, such as credit cards, payday loans and others, into a single repayment. This can simplify money management and may reduce the overall interest paid if the new loan has a lower rate.
- Balance transfer loans — Similar in purpose to debt consolidation, this loan is meant to move an existing balance to a new loan product with a lower interest rate. This helps borrowers pay down debt faster while reducing the cost of interest.
- Home improvement loans — This loan is tailored for renovations, extensions or upgrades. It can spread the cost of improvements over time while potentially boosting the value of your property.
- Car loans — This is a popular type of personal loan where the vehicle itself often acts as collateral. While car loans are most often used to purchase a brand-new vehicle, they can also be applied to finance a quality used one or even to refinance an existing car loan if you’re looking for better terms.
- Travel loans — Use this to cover the cost of flights, accommodation and other expenses for holidays or family trips. Unlike a credit card, which may carry higher interest and encourage ongoing spending, a personal loan provides a defined amount with a structured repayment schedule. This makes it easier to plan for a holiday without carrying revolving debt long after the trip is over.
- Medical loans — Help fund medical treatments not fully covered by Medicare or private health insurance. These could include elective procedures or unexpected health-related expenses.
- Dental loans — This one is similar to medical loans but specific to dental care. Orthodontics, implants or cosmetic dental work can be costly, and a loan can spread the expense over time.
- Wedding loans — Between deposits, catering, attire, entertainment and photography, wedding costs can quickly climb into the tens of thousands. A personal loan can help smooth out those upfront lump-sum payments by breaking them into manageable instalments.
- Funeral loans — This personal loan type supports families covering funeral and related costs. They are typically short-term and designed to relieve financial pressure during a difficult time.
- Education loans — This is used to pay for university fees, professional certifications or retraining programs. They can be a way to invest in future earning potential while spreading costs over time.
How to decide which personal loan is right for you
Choosing between the different types of personal loans isn’t just about comparing rates, although that is the biggest consideration. Here are some factors to think about:
- Your goals — Clarify the purpose of the loan. Debt consolidation, for example, may save you money over time if the new rate is lower, while home improvements might increase the value of your property. Matching the loan type to your objective avoids over-borrowing or choosing the wrong structure.
- Repayment capacity — Don’t just look at whether you can cover the monthly instalment today. Consider your regular expenses (like rent, mortgage, utilities), and leave some breathing room for unexpected ones. A loan should fit comfortably within your budget without leaving you stretched if life throws you a curveball.
- Total cost — Focus on the comparison rate, not just the advertised interest rate. It reflects interest plus most fees, giving a clearer picture of the real cost. For larger loans, even a slight difference in comparison rate can add up to thousands over the life of the loan.
- External resources — Government platforms such as ASIC’s MoneySmart provide calculators and impartial guides. These can help you model repayments, test different loan terms and understand the impact of fees or rate changes before you commit.
Your path to a personal loan with no catch
Personal loans aren’t one-size-fits-all, and the key is finding one that supports your goals without adding unnecessary strain. Choosing wisely means balancing cost, structure and flexibility so the loan works for you, not the other way around.
That’s where NOW Finance makes a difference. NOW Finance personal loans come with no fees ever, competitive interest and comparison rates that are exactly the same as the headline rate, you know precisely what your loan will cost from day one. Add in the support of a dedicated loan advisor, and you get a lending experience that’s transparent and straightforward.
If you’re ready to move forward, get your personalised quote now or contact us for questions and concerns.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action, you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product, you should obtain and consider the relevant disclosure documents before applying for the product. The information in this article is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may affect the accuracy of the information.
