Published in July 28, 2021
If you need that extra cash but you don’t really understand how a personal loan works, you’ve come to the right place! Understanding the process of personal loans will give you the right tools to compare and make informed financial choices.
A personal loan is a certain amount of money that you borrow from a lender for personal purposes. You repay that money over a set amount of time with added interest. A personal purpose could be anything: Paying for a big bill, consolidating debt, buying a car, paying for a holiday, or starting out as an entrepreneur are all examples for personal purposes. Personal loans are a good way to bridge short time financial issues. The set loan term will help you budget and pay off your personal loan in a specified time window.
No matter if personal or business loan, all loans work in a similar way. This is to say, not all loans are the same. You may want to look into different types first before you jump right into the application. You start by applying to borrow a specific amount from a financial institution like a bank or a private lender.
Your process of personal loans consists of 5 different steps:
When you first apply, your lender will assess your eligibility for the loan. That’s done by evaluating multiple factors regarding your financial situation. Every lender has their own process but they will most likely look at your credit score, credit report, and bank statements.
If you are suitable, you will then discuss with your lender a suitable loan term in which you pay back the full sum of money plus additional interest and fees. Your lender can charge fees for various things such as establishing the loan (=establishment fee), paying it off early, or missing a payment. Interest is another type of fee that you pay on top of your loan amount for the ability to use their money. A loan term can be anything from 1 to 7 years, and you can decide to pay back weekly, fortnightly, or monthly. What’s best for you depends on your financial situation.
Once you get approved for a loan, the lender will then immediately send you the full amount of the loan. After receiving the loan, you will make the repayments that will include the initial loan amount with added fees and interest. If you follow the repayment procedures as listed on your loan contract, your loan will be repaid in full by the time your term ends.
Previous to your application, there are a few more things to look into. How do you decide what loan is best for you? How to know what interest rate is available to you? What are your chances to get accepted? It’s best to know your options before you apply. Therefore, it is a good idea to keep an eye on your credit score and make sure that it grows over time. How? Tools like Tippla allow you to check your score frequently and improve it by taking action.
The process of personal loans is as simple as this: You start with a comparison of your options, check your eligibility, apply, get approved or rejected, have the loan funded, repay the loan, and finally loan closure.
However, you should think twice before taking on debt. Can you easily afford repayments? If you are unsure, the national debt hotline provides free financial counselling.
The first step in taking out a personal loan is deciding what type of personal loan you’ll need. Here are some of the options to consider when taking out a personal loan:
After deciding which type of loan best suits your needs and financial situation, it’ll be time to compare offers from banks and lenders. Here’s what to look out for:
With all loans in Australia, you will need to meet the minimum requirements to qualify. While each lender may have additional criteria, these are the basics:
Every lender will have a different application process. However, almost every lender will require the following when you first apply for a loan:
How long it takes for you to get your answer depends on the lender and their system. While some lenders can give you an answer immediately, some may take up to 2 weeks to approve your application. Once you provide all the necessary information, all you can do is wait on the result of your application.
Once you get approved for a loan, your lender will send you your funds as soon as possible. This may be an immediate transfer depending on your bank provider or may take a few days until it shows up in your bank account. If you e.g. take out a car loan, the lender may send the full amount directly to the car dealership. On the contrary, if you take out an unsecured loan, the funds will be sent to your nominated bank account.
Most lenders allow you a certain amount of freedom with your repayment structure. You can choose to pay the loan (and interest) weekly, fortnightly, or monthly. They may allow you to decide the loan term and set it up in a way that suits you. Something to keep in mind is that your interest depends on your loan term. A shorter loan term means you will overall pay less interest.
Once you’ve made your final repayment, the loan will then be closed.
It’s as simple as that!
While we at Tippla will always do our best to provide you with the information you need to financially thrive, it’s important to note that we’re not debt counsellors, nor do we provide financial advice. Be sure to speak to your financial services professional before making any decisions.
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