How do personal loans work?

Find out how a personal loan works every step of the way.

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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.

Comparison Eligibility Application Approval Loan funding Repayment Loan closure

Step 1: Comparison

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:

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 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.

If the loan is an unsecured personal loan, the funds are sent to an account you nominate. Some lenders can transfer funds on the same day you apply, while others might take a few days following approval.

Step 6: Repayment

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.

Compare a range of personal loans

Harmoney Unsecured Personal Loan

Harmoney Unsecured Personal Loan


6.99 % p.a.


  • Borrow from $2,000
  • 100% online
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100% confidential application

Harmoney Unsecured Personal Loan

Apply today to get approved within minutes for up to $70,000.

  • Max. loan amount: $70,000
  • Loan term: Up to 60 months
  • Turnaround time: 99% of approved online applications funded in 24 hours
  • Fees: Establishment fee of $200 for loans from $2,000-$5,000 and $450 for loans from $5,000-$70,000
  • No early repayment fees
  • Personalised interest rates based on your circumstances
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Updated February 17th, 2020
Name Product Interest Rate (p.a.) Min. Loan Amount Max. Loan Amount Loan Term Monthly Service Fee Application Fee
Stadium Finance Personal Loan
9.95% - 19.95%
Up to 60 months
Varies with lender
Stadium Finance negotiates loan terms with a network of lenders. Borrow between $3,000 to $100,000 and funds paid within one day of approval. Eligibility: Must be 18+. Other requirements depend specific lender.
Pronto Secured Personal Loan
11.97% - 29.97%
Up to 60 months
Get faster, fairer finance where we reward good customers with low interest rates and offer quick approvals and our 9 minute guarantee!
Harmoney Unsecured Personal Loan
6.99% - 29.99%
Up to 60 months
$200-$450 depending on loan size
Apply for an unsecured personal loan up to $70,000 with no early repayment fees. Eligibility: Be a NZ resident/citizen and have a good credit score.
Lending Crowd Personal Loan
3 or 5 years
$250-$1,450 depending on the amount borrowed
A secured personal loan from $2,000 to $200,000 with repayment instalment options. Eligibility: Be an 18+ NZ permanent resident, earn $30,000 or more, have a good credit history and collateral/security.
NZCU South Personal Loan (Unsecured)
9.15% – 20.95%
Up to 7 years
An unsecured personal loan up to $50,000 with personalised repayment options. Eligibility: Be an 18+ permanent NZ resident or non-resident on a working visa, earn $500+ weekly.
NZCU South Personal Loan (Secured)
8.9% - 20.95%
Up to 7 years
A secured personal loan up to $50,000 with personalised repayment options. Eligibility: Be an 18+ permanent NZ resident or non-resident on a working visa, earn $500+ weekly.
Admiral Finance Secured Personal Loan
13.95% - 23.95%
Up to 60 months
$125-$595 depending on loan size
A secured loan from $1,000 to $50,000 with a quick online application process. Eligibility: Be an 18+ permanent NZ resident, have collateral/security, earn at least $450 per week.
QuickLoans Personal Loan
9.95% - 23.95%
Up to 60 months
$95-$595 depending on loan size
Borrow up to $20,000 and apply online within 5 minutes. Eligibility: Be over 21, hold permanent NZ residency, have collateral/security, earn at least $450 per week.

Compare up to 4 providers

Questions we are asked about how personal loans work

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