Looking to apply for a personal loan but want to know more? Find out here how they work and how you can apply. Whatever the reason you’ are looking for a personal loan, to finance a new or used car purchase; consolidate debt; pay for a holiday or to cover wedding costs, there are a variety of personal loans for you to choose. Use the guide below to help you choose the right one for your needs and situation.
How do personal loans work?
Personal loans work in much the same way as any other type of loan. You borrow a certain amount of money from a bank or lender so you can pay for the things you need. You sign an agreement with the lender to pay back the loan in monthly, fortnightly or weekly repayments.
Essentially, a personal loan helps you fill a short-term or long-term financial need. You apply for a loan with a lender who assesses your suitability, and if you are approved the lender provides the funds for the loan. Your repayments include the principal loan amount plus fees and interest. If you make the repayments as set out in your loan contract, the entire loan is repaid when your loan term ends.
The personal loan process
Jump ahead to one of the steps in the personal loan process to find out more about it.
Finding the right personal loan is the first step in the process. There are a few parts to this, the first is choosing the type of personal loan you want. Here is a breakdown of the main types of personal loans available:
These loans are specifically designed for the purchase of a vehicle. This vehicle is usually a new or used car but may also be a motorbike, motorhome, caravan or boat. The vehicle is used as security for the loan, meaning if you default the lender can sell the vehicle to recoup its losses. Some car loans like AA Finance attract an interest rate of 9.95 to 15.95%, whereas with others the rate can be as high as 29%. There may be restrictions on the age and condition of the vehicle, so check this before you apply.
These loans are similar to car loans in that you need to attach an asset, such as a vehicle, as collateral. However, you don’t necessarily need to use the funds you borrow to purchase said asset. . This may be the case, or you may already have the asset in your possession and use the loan to consolidate debt or undertake home renovations. Secured loans are less risky for lenders, so they may offer lower rates.
If you are looking to obtain funds without offering an asset as collateral; you can consider an unsecured loan. As there is a higher risk for lenders, if you default (the lender can’t claim any of your assets to recoup its losses), the interest rates are usually higher, but you will have more flexibility with how you use the loan. For example, you could purchase an asset, as well as use it to consolidate debt., You can use the loan for whatever you choose.
Also referred to as cash advance loans or payday loans; these are smaller loans with shorter loan terms and a fast turnaround of funds (usually available within 24 hours). They can involve borrowing amounts of between $100 and $5,000 and are paid back over shorter periods. . However, due to their extremely high-interest fees (charged as a percentage of the principal), these loans should only be considered when you have no other alternative.
This type of credit is attached to your transaction account. You can access up to and including a specified limit when your available funds are exhausted, and you are charged a set rate. A monthly or annual fee is usually charged for use of the credit line, but you won’t be charged interest unless you use the overdraft.
This is similar to an overdraft except it is separate to your transaction account. You have a specific limit that you can draw up to and including, and you are only charged for how much you use. As you repay the debt, the credit limit becomes available again.
After you have decided what type of personal loan you want to apply for, here is how to compare personal loan offers from different banks and lenders:
Loan amount. What is the minimum and maximum amount the lender lets you apply for and is it enough for your purpose?
Loan terms. What are the minimum and maximum loan terms? Usually, terms of between one and seven years are available, but terms differ between providers.
Fees. Check for upfront fees, such as establishment or application fees and ongoing fees such as monthly or annual fees. These need to be incorporated into your loan amount.
Interest rate. Is the rate fixed or variable? Is the rate competitive?
Repayments. Once you know your loan amount and terms, you can use a loan repayment calculator to see if the repayments are affordable on your budget.
Repayments. Can you choose between weekly, fortnightly or monthly repayments? Can you make extra repayments without a fee? Can you repay the loan early without penalty?
Step 2: Eligibility
Lenders have set minimum eligibility criteria for their personal loans. This can include any of the following:
Age. You need to be 18 to apply for a loan for New Zealand. Some lenders may require you to be over 21.
Income. You may need to earn a certain amount to be eligible to apply for a loan. This may be $35,000 or lower, for example, $24,000. Find out more about borrowing on a low income here.
Employment. Most lenders require you to be employed, but some consider unemployed applicants. Some lenders also require you to be out of your probation period or employed full-time. You can find lenders that consider casual employees here. Some lenders may consider applicants receiving Work and Income payments.
Residency. You may have to be a New Zealand citizen or permanent resident to be eligible for a personal loan, although some lenders consider temporary residents.
However, even if you meet the minimum requirements for a loan, you will not be approved unless you can prove you can afford the repayments. Lenders determine this by looking at your income, your debt and the stability of your employment.
Step 3: Application
The application process for a personal loan differs between lenders.You have the option of applying online, in-branch (if the lender has branches) or over-the-phone. You can find a list of documents and information required to complete the personal loan application on finder.com/nz review pages, and on the lender’s website, and they may include any of the following:
ID. You will need to provide your driver’s licence, passport or a form of photo ID.
Proof of income. Depending on the lender, you will need three to six months of payslips, bank statements and two years’ of tax returns if you are self-employed. If you receive Work and Income payments you will need receipts to show your income.
Other financial documents. If you have other debt, such as loans or credit cards, you will need statements from those accounts.
Online applications usually take about 15 minutes to complete.
Step 4: Approval
Some lenders give you an answer instantly, while others may take a few days or weeks to approve you. There are two forms of approval: full approval or conditional approval.
Conditional approval usually takes less time, but is given pending more information from you, such as additional payslips or documents relating to your assets or debt. Lenders may ask for this information and not offer conditional approval. This helps them make a more informed lending decision.
Full approval is given when you have supplied sufficient information for the lender to make a decision, and the lender has approved you for a loan.
Step 5: Loan funding
Your loan may be funded in several ways, depending on the type of loan it is and what you are using it for. For example, when you take out a car loan the lender may pay the car seller directly. This is often the case with a debt consolidation loan as well, with the lender sending funds to your debtors directly rather than to you.
Most lenders allow you to choose your repayment structure. That is, weekly, fortnightly or monthly repayments. Generally, the more often you repay your loan, the less interest you pay. When choosing your repayment structure, you may want to consider additional and early repayments.
Find out if your lender charges fees for additional repayments
Check if your lender has restrictions on how much you can repay per year (generally fixed rate personal loans have this)
If you’re planning to repay your loan early, check if there is a penalty you have to pay
Step 7: Loan closure
If you are simply making repayments as set out in your loan contract, then your loan should be closed following your final repayment. However, if you are planning to repay your loan early, it’s a good idea to call the lender and ask for a final payout figure, if you’re getting close to paying off the loan. This is to ensure the loan is closed when you make your final payment, and you aren’t charged any unexpected interest.
Questions we are asked about how personal loans work
No. If an application fee is charged, with the personal loan you’re applying for, it is added to your loan amount once you are approved. It is then paid off with your current repayments.
As with any financial product, there are fees payable by you to your lender. These may include approval fees, repayment fees, establishment fees and redraw fees to name a few. It’s important you read and understand the loan contract before applying. If there is any wording you are unsure of it’s essential you ask your lender.
If you have paid extra funds into your loan account, you may be able to access these funds, if the loan allows. If it does not affect your repayments or your total outstanding balance, you could withdraw these funds.
This is simply the word to describe when the loan funds are made available to you by your bank.
When you take out a variable rate loan the interest rate you are charged may change over the term of your loan. A fixed rate loan will have an interest rate that doesn’t change.
This is entirely dependant on your financial situation, goals and needs. If you want flexibility and the ability to make extra repayments and access extra funds, then a variable rate option is one to consider. If you want stability and peace of mind, knowing your repayments won’t change over the life of the loan, then a fixed rate could be for you.
You need to find out what date your loan repayments are due and work out a budget accordingly. You can usually make payments via bank transfer or direct debit, depending on what your lender offers.
If you are struggling to make a repayment, you should immediately contact your bank or lender. They may defer the payment for a month or work with you on a solution. It is important to note you may be charged extra interest for this.
You may be able to do this, but it is important to contact your lender to obtain a payout figure. You may incur break costs and other fees and charges.
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.