A personal loan is a secured or unsecured line of credit up to $100,000 over five or seven years. You can use the money for a range of purposes, such as buying a car, consolidating debt, paying for a wedding or even taking a holiday. Personal loans are an agreement between you and a lender for you to have a certain amount of money and pay it back over time.
How do personal loans work?
A personal loan is a secured or unsecured line of credit up to $100,000 over 3 months to seven years. You can use the money for a range of purposes, such as: buying a car; consolidating debt; paying for a wedding, or even taking a holiday.
Personal loans are an agreement between you and a lender for you to be given a certain amount of money and pay it back over time. Here is how personal loans work:
Application and approval. You can apply for a personal loan from a bank, credit union or standalone lender online. It can be done over the phone or in-branch, depending on what application types the lender offers. The time it takes to be approved depends on the lender, but it can range from anywhere between 60 second to a week or two.
Loan contract. When you are approved for a loan you will need to agree to a loan contract that sets out certain terms. These terms include how long you will have to repay the loan (the loan term); what fees you need to cover; and the rate of interest you will be charged on your loan amount.
Loan terms. Your loan terms will be set out in your loan contract. Generally, loan terms range between 3 months and seven years.
Loan costs. Lenders agree to lend you money in exchange for interest, which is charged annually. This interest can be fixed or variable. Other loan costs include establishment fees, monthly fees and annual fees. You should also check if you will be charged fees for repaying your loan early or making additional repayments.
Loan types. There is a wide variety of personal loans available in the market, with each one coming with a set of terms and restrictions. For instance, when you apply for a car loan the lender often requires that the entire loan amount be used for your car purchase. The car is also generally required to be used as security in case you default on the loan. An unsecured personal loan, on the other hand, is less restrictive and you can use the loan amount in almost any way you choose.
How do I choose a personal loan?
The types of personal loans that are available to you
There is a wide range of personal loans available in New Zealand to those who have stellar credit, average credit or bad credit. Find out what loan may work for you with the below options.
Secured personal loans. This type of loan works by you offering an asset as security in exchange for lower rates and fees. Usually, this loan is used to purchase a car, but other types of assets can be used as well.
Debt consolidation loan. Existing debt can be managed by taking out a debt consolidation loan. Consolidate separate loan accounts into one easy-to-manage loan with a potentially lower rate and with fewer fees.
Overdrafts. An overdraft is a lot like an unsecured loan but it is generally attached to your everyday bank account. You are given a set amount that you can withdraw from your account, once your own funds have been exhausted.
Features of personal loans: What makes a loan competitive?
When comparing your personal loan options, it is helpful to keep in mind the range of features available with these loans. When you are comparing the options, here are some of the questions you need to ask.
Does the loan have a competitive interest rate? Rates on personal loans are either fixed or variable. Compare rates across similar loan products to ensure you are getting the best deal.
What are the fees and charges? You need to consider both ongoing fees and fees charged at the onset of the loan. Common fees include an application fee or loan set-up fee, while monthly fees and annual fees are common ongoing fees. You may also be charged to use additional features of the loan.
Is there repayment flexibility? How often are you able to make repayments? Are you able to make additional repayments or pay off the loan early without penalty?
Do the loan terms match your needs? Personal loans are usually offered for terms of between 3 months and seven years. Some lenders are more restrictive than others when it comes to how long you have to repay your loan, for example, only offering terms of one, three or five years. Make sure the loan terms on offer are what you need. Long term loans over seven years often see lower repayments, but you will pay a greater amount of interest.
The interest rates and fees to expect on personal loans
The interest rate and fees you are charged depend on the loan you apply for (you can compare these on the table above), but each loan type comes with similar costs and understanding these can help you compare personal loan options.
The interest rate
Your interest rate will either be fixed or variable. Car loans tend to come with fixed rates while unsecured loans offer both, but you will find a mix of variable and fixed rates within each loan type. Variable rate loans mean the loan is more flexible and comes with longer loan terms, but fixed rate loans usually come with restrictions, such as not allowing you to make extra repayments. Fixed rate loans come with shorter terms, usually up to five years.
There are three types of fees you should expect: Upfront fees (establishment fees, application fees), ongoing fees (monthly, annual or direct debit fees) and fees that are charged if you default on the loan or miss a repayment.
How to get the right personal loan for you
Hi I’m Elizabeth, Personal Loans Editor at finder.
With all the features that come with personal loans you might be wondering what you actually need to look at to find the right personal loan for you.
Well, in this video I’m going to take you through the four most important things to consider when finding the right personal loan for you: interest rate, fees, security and credit history requirements.
Firstly the interest rate. This point isn’t about finding the most competitive interest rate, while that does remain important. Before you do that you need to choose whether you want your interest rate to be fixed or variable.
Fixed means your interest rate will remain the same for the duration of your loan term. While variable means your rates may change.
You may be able to find a slightly lower rate if opting for a fixed rate personal loan but there aren’t huge differences between them. The main differences are in repayment flexibility.
Generally, you won’t be able to make additional repayments on a fixed rate loan or repay the loan early. If you want to make additional repayments you may be restricted as to how much you can pay extra or you may be charged a fee to do so.
You won’t find these restrictions on a variable rate loan. Decide which interest rate type will work best for you and compare rates to find a competitive one for you.
The second point to consider is fees. There are a few fees that can come with personal loans that can be charged at the start of the loan, such as an application fee or an establishment fee or that can be charged during the loan term, such as a monthly fee or an annual fee.
The main thing is to consider what fees you’ll be charged as part of the loan and to consider that as part of the cost.
The comparison rate which is shown in finder personal loan tables will give you an idea of this cost because it includes the interest rate plus the fees.
The third thing you need to consider is security. And that is whether the loan you want to take out is going to be secured or unsecured. Secured loans can be an option if you’re going to be purchasing something that you can use to secure the loan with, such as a car. You can also use something you already own such as a vehicle or equity in your home as security for a loan. But keep in mind that if you default on your loan, the lender is able to sell that asset in order to recoup its losses.
The last thing we’re going to talk about is credit history requirements for personal loans.
Lenders consider information in your credit file and your credit score to help decide whether you’re eligible for a personal loan. If you have any bad credit listings such as defaults, multiple missed payments, or bankruptcies you may need to consider a bad credit lender.
So now you know the four most important things to consider you can start a comparison on finder.com.au and find a personal loan that will meet your needs.
For more information on getting a personal loan head over to finder.com.au.
Applying and being approved for a personal loan
Who is eligible for a personal loan?
Documents you need for your application
How to improve your chances of being approved
The application process
Who is actually eligible for a loan?
Eligibility for personal loans depends on a few different things:
If you have a low income. Applicants with low incomes can still be approved for personal loans. However, it is always a good idea to check the borrowing requirements and check your repayments with a calculator.
If you receive Work and Income payments. If you receive a pension, Work and Income payments or other benefits, you may still be eligible. It is important to make sure you can meet the repayments before applying.
If you have bad credit. You are still able to apply for certain personal loans if you have negative marks on your credit file. Bad credit loans are still possible. You might end up paying a higher interest rate on these loans, so it is important to compare a range of offers before applying.
If you have existing credit card or personal loan debt. You may still be approved for a new personal loan , but you should calculate your repayments and your debt levels before continuing.
If you don’t meet the minimum requirements. You still might be able to apply with a guarantor. This is where someone, usually a family member such as a parent, agrees to ”guarantee” your personal loan should you fail to meet your obligations.
I AM A TEMPORARY RESIDENT ON AN ESSENTIAL SKILLS WORK VISA. CAN I STILL GET A LOAN?
Did you know you may still get your personal loan approved if you hold a visa, but many of the big banks won’t lend to you. If you are researching institutions that might lend to you on your temporary essential skills work visa, then it is best practice to go in armed with as much knowledge as possible. Find out which banks might offer you a loan; what the criteria is and how you can maximise your chance of being approved.
What documents will I need when applying for a loan?
Each bank and institution have their own criteria you have to meet to finalise your loan application.
You will usually need any of the following to prove your identity:
Driver’s licence/18+ card
Community Services Card
Utility bill showing your address
You will need to verify your income. The actual verification required may differ between lenders. Common requirements are as follows:
Two years tax returns (if self-employed)
You may also need any of the following documents:
Statements from other loan accounts/credit cards
Applying for a car loan requires various documents to have the car verified:
VIN or chassis number, engine number and registration plate details
The car dealers contact information or the seller’s contact details if it is a private sale
Tax invoice and receipt for the car or purchase price if a private sale
Comprehensive insurance details.
How can I improve my chances of the loan being approved?
There is no way to guarantee you are approved for a personal loan, but giving yourself the best chance at being approved starts with meeting the eligibility criteria set by the lender. To further your chances of being approved, keep the following in mind:
Establish your borrowing capacity. What repayments can you afford? Lenders will use a variety of criteria to decide how much you are eligible to borrow, but you need to know how much you can afford to repay.
Building good banking history. Keep your account in good standing to build a positive relationship with your bank, even if you don’t plan on borrowing from them.
Keep your credit rating in good status. Make sure you keep track of all your payments, from credit cards to utility bills, because any arrears, debts, or missed payments will affect your ability to access credit.
Keep track of your saving goals. If you manage to contribute to your savings regularly, it shows lenders you are likely to manage ongoing loan repayments.
How to apply for a personal loan
Get ready to make your purchase. Make sure you know how much you want to borrow and have worked out that you can meet the repayments.
Choose a secured or unsecured loan. If you already own as asset or are looking to buy one, then a secured loan may be an option. If not, you may want to consider your unsecured personal loan options.
Decide between a fixed or variable rate. A fixed rate loan means the repayments are set for the life of the loan and can’t fluctuate, whereas a variable rate loan can increase or decrease repayments over the life of the loan.
Start your personal loan research and comparison. This is an important step to finding the best loan option for you.
Click through and apply. Once you find the loan you want to apply for, simply click ”Go to Site” to apply.
Why is there an interest rate and a comparison rate?
Companies usually display an interest rate and also a rate that is inclusive of fees and charges. This is called a comparison rate and is a crucial tool when comparing loans. For example, if a personal loan has the interest rate of 12.45% p.a, but a comparison rate of 14.52% p.a. it would indicate there is a range of fees included in the loan. If the loan has an interest rate of 10.13% p.a and the exact same comparison rate, then this indicates there are no fees included in the loan. For a detailed view, read our guide to personal loan comparison rates.
The questions we’ve been asked about personal loans
Different lenders will have your loan amount transferred to you within varying amounts of time. Some banks are able to offer existing customers same-day personal loans and some payday lenders can have loan amounts transferred to new customers within an hour of approval. If you are in need of the cash as soon as possible, it is advisable to check to see how long it will take to receive your loan amount before you apply.
At the time of writing the average rate is 14% p.a. However, it is important to keep in mind interest rates can fluctuate from 6.9% p.a up to 30% p.a. (or more depending on your credit score). The rate will depend on whether the loan is a fixed or variable rate; secured or unsecured.
Secured loans, as the name suggests, means you offer something of value as security on the loan. If you don’t pay, you may find the bank will repossess your car (or any other item offered as security) and sell it.
Unfortunately, there is no easy answer to this question. The best loan for you will depend on what you need and also what loans you are eligible for. You can use the comparison tables available on finder.com/nz to compare similar loans and select the most competitive loan option that offers the features you want. If you are eligible, then you can apply.
You may be able to pay back your personal loan early but it depends on the conditions of your loan. Most variable rate personal loans allow for additional repayments or paying back the loan ahead of time without penalty. Fixed rate personal loans usually come with exit fees and early repayment fees; or limitations on how much you can repay ahead of schedule. You will need to check if there are fees involved before paying extra on your loan. While you may save on interest repayments, you may not come out ahead if you have to pay early payout fees. You can calculate how much you may potentially save using this calculator. You can find out if you can repay your car loan early on this page.
If you are having trouble repaying your loan you need to get in contact with your lender as soon as possible. They may be able to organise a payment plan with you, or offer some sort of option to help you manage your repayments. You also have the option of getting in touch with the Citizen’s Advice Bureau on 0800 367 222 and they will put you in touch with a non-profit organisation that can help to organise your budget.
Same day personal loans are a relatively new feature, and requires you to meet the criteria set out by the bank. Some require you to be an existing customer or apply by a certain time of day. If you are approved, you will get access to your funds on the same day. Find out what lenders offer this feature.
The answer to this question depends on what type of loan you are applying for. If you are wanting a secured car loan then all details of the car, finance agreement and registration must be given to the bank or lender before you receive the money. However, if you are getting an unsecured personal loan, then you only need to give a general idea of the loan purpose to the bank. If you are consolidating debts, you will have to give details of your other loans and credits to the institution.
You can consider an unsecured personal loan or a secured personal loan if you are buying a car. Personal loans can be used for purchasing a car, especially if you want to buy an older model or a car that does not fit with a lender’s criteria. An unsecured personal loan could be used for a car, but it is important to keep in mind that unsecured personal loans come with a higher interest rate than a loan secured to a vehicle.
If you have been approved for a home loan that falls short of your chosen property’s valuation you may be considering if it is worth applying for a personal loan. Personal loans might also be on the table to cover Lenders’ Mortgage Insurance (LMI). While this is an option, you need to consider if you will be approved for your personal loan (consider the home loan you have been approved for); and whether you can afford the repayments in addition to what you are paying towards your mortgage.
Credit unions are different to banks in that they operate on a not-for-profit business model. Typically you will find there are not as many fees or charges with a credit union loan, which means the interest rate may be lower. Credit Unions are governed by the same regulations as banks so it is just as safe to apply for a credit union personal loan.
If you have a variable rate personal loan, then you may notice your interest rate goes up or down. This could happen due to a range of factors but is mainly based on what the Reserve Bank of New Zealand dictates the official cash rate to be. If you have found you rate has gone up, it may be a good time to consider refinancing your personal loan.
Credit cards can give you convenient access to a line of credit and you do have the choice between a personal loan or credit card for a variety of purchasing needs. To work out which option is best for you think about how you need to make the purchase (if it is in cash you will be charged a cash advance rate with a credit card); how you want to repay your loan (you can choose to just repay the minimum amount with a credit card); and what you are purchasing with the funds.
Whilst a short term loan, also known as a payday loan, is a type of personal loan there are a range of differences that make this type of lending completely different. Personal loans are generally taken out over 3 months to seven years, whereas a payday loan is usually between 7 days and one year. Payday loans are also for smaller amounts – between $100 and $5,000 – and are available to those with bad credit.
Personal loans can vary greatly in size from $1,000 and upwards of $80,000. If you are purchasing an asset such as a car, keep in mind you may need funds to cover insurance. Many banks and lenders consider up to $20,000 and $30,000 to be a medium sized loan. If you are only going to borrow between $10,000 and $20,000 then a small personal loan may suit your needs better.
Many lenders offer loan protection insurance as an add-on to your personal loan. This insurance can pay the minimum repayments on your personal loan if you lose your job; or cannot work because of illness or injury. You usually apply for the insurance when you are approved for the loan but you may be able to get the insurance further into the loan term.
There is increasing demand for loans from people like you who want to protect mother earth. Kiwibank offer a “Sustainable Energy Loan Programme” that can be added to a mortgage you already hold with them. They also offer $2,000 over 4 years towards the system.
Most lenders will have a minimum income you need to earn to be eligible, but others will only require that you are employed or have the means to repay the loan. Minimum incomes can range from $14,000 p.a. to $50,000 p.a. but there are low income personal loans available.
Lenders use a variety of information to determine your eligibility for a personal loan, including your credit rating. The information on your credit file includes negative information such as defaults and bankruptcy listings; and personal information such as your name and address. From 2012 onwards, New Zealand credit agencies have included positive information about your credit history, such as regular credit card and mortgage repayments.
You can check your credit score for free with finder to get a better idea of where you stand.
Some lenders offer different interest rates to different borrowers depending on how risky they are to lend to. This is what is called “risk-based pricing”. Lenders that use risk-based pricing may use your credit score as an indicator of how risky you are to lend to.
You can check the information in the finder.com/nz personal loan comparison tables to see what lenders consider when calculating your interest rate, what the interest rate range is (ie the minimum and maximum rate you can receive) or if the interest rate displayed is the rate you will get if you are approved for the personal loan.
Once you have successfully applied and received your funds, it is important to keep your loan repayments up to date. If you have applied for a loan with the bank your everyday account is with, then you will probably have an automatic direct debit set up. If your loan is with a separate institution, it is a good idea to set up an automatic transfer, via internet banking, a few days before your due date to allow for processing time. You will be able to check your balance, interest rate, repayment dates and schedules. You should login to your loan account regularly to check notifications and payments details. If you want to make additional payments then you could do this by internet transfers or if your bank allows it, over the counter deposits. If you miss a payment due to insufficient funds then it is important to call the bank and attempt to rectify the situation as soon as possible.
Yes, personal loans can help with your business needs too. You can access personal financing to help cover business needs — everything from trucks to equipments can be purchased or even leased with a personal loan. The same is true even if you have bad credit. Business vehicles including company cars, trucks or vans can all be financed with a personal loan. If your business requires specific equipment to purchase or lease, such as forklifts, earthmoving equipment, workshop machinery or even office equipment, you can take out a personal loan to help cover the costs. You won’t have to hurt your business’ cash flow to make the purchase.
It’s important to know whether or not you are able to cancel your contract through the cooling-off period. Once you know that you are able to do this, fax a letter to the vehicle trader explaining that you would like to break the contract in accordance with the cooling-off period. Keep a copy of it and ask for proof that the company received it within three days of you signing the contract.
Some car traders do not allow you to have cooling-off rights. This is important to know before you try and break the contract due to the cooling off period.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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