A personal loan interest rate is only one part of what a loan costs you, so the number in the headline should never be the only thing you compare.
If you live in Macedon and are weighing up a personal loan, you probably want a clear answer on what the loan will cost and what you will pay each month. This article walks you through how rates are set, how to compare offers properly and how to work out repayments before you apply.
How Do Personal Loan Interest Rates Work?
A personal loan interest rate is the yearly cost of borrowing, shown as a percentage of the amount you owe. The lender charges it on your remaining balance, so as you repay the loan, the interest portion of each repayment generally gets smaller.
Most lenders offer either a fixed rate personal loan or a variable rate personal loan. A fixed rate stays the same for the whole loan term, which makes budgeting predictable. The trade-off is that fixed loans can limit extra repayments and may carry an early exit fee if you pay the loan out sooner. A variable rate can move up or down over time, so your repayments can change, but variable loans often allow extra repayments with fewer limits. Features differ between lenders, so check the product disclosure documents.
What Affects the Interest Rate You Are Offered?
Lenders set your rate based on their view of risk, so the rate you are offered can differ from the rate advertised. Common factors include your credit history, income, existing debts, the loan amount and whether the loan is secured.
An unsecured personal loan has no asset attached to it, and lenders often price it higher than a secured personal loan, which is backed by something like a vehicle. The trade-off with secured lending is that the lender can take the asset if you cannot repay. If you are buying a vehicle, our car loans page explains that option in more detail.
Your loan term also matters. A longer term lowers each repayment but usually means you pay more interest overall.
Comparison Rate vs Interest Rate: Which Number Matters?
The comparison rate gives a fuller picture than the interest rate because it combines the interest rate with most upfront and ongoing fees into one yearly figure. Use it to compare personal loans side by side, then look at the fee schedule for detail.
Fees to look for include an establishment fee, a monthly fee and an early exit fee. A loan with a low interest rate and high fees can cost more than a loan with a slightly higher rate and low fees. If a term is unfamiliar, our jargon translator breaks it down in plain English.
Calculating Personal Loan Repayments: A Worked Example
You can estimate repayments by multiplying out the loan amount, rate and term, or by using a calculator. The example below is illustrative only and uses a rate of 6.75% p.a.
Consider a Macedon couple who want to borrow $20,000 for a bathroom renovation. They compare a three-year term with a five-year term, both at the illustrative 6.75% p.a. and with no fees included.
- Over three years, the monthly repayment is about $615, and total interest is about $2,147 (about $2,150).
- Over five years, the monthly repayment is about $394, and total interest is about $3,620.
The five-year term cuts the monthly cost by about $221, which suits their budget. The three-year term costs about $1,470 less in interest. They choose the five-year term but plan to make extra repayments when they can. They confirm first that their chosen lender allows this without a fee. Their outcome is a repayment they can manage, with a clear path to paying the loan off sooner.
How Repayment Frequency Changes What You Pay
You can often choose weekly repayments, fortnightly repayments or monthly repayments, and the choice affects cash flow more than it affects the rate. Matching repayments to your pay cycle makes it easier to avoid missed payments.
Paying fortnightly can reduce interest slightly because the balance falls more often, but this depends on how the lender calculates interest. Some lenders also charge different fees by frequency. Ask the lender how interest is calculated before you choose.
How to Compare Personal Loan Offers Step by Step
The most reliable way to compare offers is to line them up on the same loan amount and the same term. Changing either one makes the rates hard to compare.
- Decide the amount you need and a term you can afford.
- Collect the interest rate, comparison rate and all fees for each offer.
- Check whether extra repayments are allowed and what an early exit costs.
- Work out the total cost over the full term, not just the monthly figure.
Each loan application can leave an enquiry on your credit file, so avoid lodging several applications at once. A broker can compare options from a range of lenders before you apply, which helps limit the number of applications you make. Our personal loans page outlines how we approach this.
Can Debt Consolidation Lower Your Interest Rate?
Consolidating credit card debt into a personal loan can lower your rate if the new rate is below what you pay now, but it only helps if you stop adding to the old balances. Credit card rates are often higher than personal loan rates, though this varies by product.
The trade-off is that stretching the debt over a longer term can increase the total interest, even when the rate is lower. If you already have a home loan, it is also worth asking for a loan health check to see whether other options suit your situation.
Consider someone with $12,000 across two credit cards who moves it to a three-year personal loan at the illustrative 6.75% p.a. The monthly repayment is about $369, which gives them a fixed end date. They close one card and keep the other with a low limit. The outcome is one repayment and a set payoff date, provided they keep the cards from building up again.
If you would like help comparing personal loan options, call one of our team or book an appointment at a time that works for you through our booking page. We will talk through your goals, check the fees and show you the full cost before you commit.
Frequently Asked Questions
What is the difference between a fixed and variable personal loan interest rate?
A fixed rate stays the same for the whole loan term, so repayments are predictable. A variable rate can change, which means repayments can rise or fall, but these loans often allow extra repayments more freely.
Is the comparison rate more useful than the interest rate?
The comparison rate combines the interest rate with most fees into one figure, so it gives a fuller picture of cost. It is still worth checking the fee schedule for early exit and monthly fees.
Does a longer loan term cost more?
A longer term lowers each repayment but usually increases the total interest you pay. In the illustrative example at 6.75% p.a., a $20,000 loan costs about $1,470 more in interest over five years than over three.
Does applying for several personal loans affect my credit?
Each application can leave an enquiry on your credit file. Comparing options before you apply helps you limit how many applications you make.
