When a personal loan makes sense

A personal loan is a fixed-term, fixed-rate loan — you borrow a set amount, repay it in equal instalments over a set period (usually 1–7 years), and know exactly when it will be paid off. This makes it fundamentally different from a credit card, where the balance can persist indefinitely.

Personal loans are typically used for:

• Debt consolidation — paying off higher-interest debts (credit cards, BNPL) with a single lower-rate loan
• Major purchases — a car, home improvements, medical procedures
• One-off expenses — a wedding, a funeral, a relocation

This guide covers how to manage a personal loan effectively, whether you're considering one or already have one.

Understanding your personal loan

Before managing a personal loan, understand its terms:

The key numbers

• Principal — the amount you borrowed
• Interest rate — the annual rate charged on the principal. Fixed rates stay the same; variable rates can change.
• Term — the length of the loan, usually 1–7 years
• Monthly repayment — the fixed amount you pay each month
• Total cost — principal + total interest over the term
• Fees — establishment fee, monthly fees, early repayment fees

Example

A $10,000 personal loan at 12% over 3 years:

• Monthly repayment: $332
• Total interest: $1,952
• Total cost: $11,952

If you extend the same loan to 5 years:

• Monthly repayment: $222
• Total interest: $3,347
• Total cost: $13,347

The longer term reduces the monthly payment but increases the total cost by $1,395. This is the central trade-off in personal loan management: lower payments vs higher total cost.

Step 1: Know whether your rate is competitive

Personal loan rates in Australia typically range from 6% to 20%+, depending on:

• Whether the loan is secured or unsecured — secured loans (against a car or other asset) have lower rates
• Your credit score — higher scores get lower rates
• The lender — banks, credit unions, and online lenders all offer different rates
• The loan amount and term — larger loans and shorter terms sometimes get better rates

Check your current rate

If you have a personal loan, check your rate. If it's above 15%, you may be able to refinance to a lower rate, especially if your credit score has improved since you took out the loan.

Compare before borrowing

If you're considering a personal loan, compare rates from multiple lenders. Use comparison sites, but also check credit unions and online lenders, which often offer better rates than the big banks.

Step 2: Decide on the right term

The term determines your monthly payment and total cost. Shorter terms mean higher payments but lower total cost; longer terms mean lower payments but higher total cost.

How to choose

• Choose the shortest term you can afford. This minimises the total interest. But don't stretch yourself so thin that one unexpected expense causes a missed payment.
• Aim for a payment that fits your budget. Use the free payday calculator to see your available money, and ensure the loan payment fits comfortably.
• Be wary of terms over 5 years for non-essential purchases. A 7-year loan for a car means you're paying for the car long after it's lost most of its value.

The term comparison

For a $15,000 loan at 10%:

| Term | Monthly payment | Total interest | Total cost | |---|---|---|---| | 2 years | $692 | $1,601 | $16,601 | | 3 years | $484 | $2,425 | $17,425 | | 5 years | $318 | $4,058 | $19,058 | | 7 years | $249 | $5,838 | $20,838 |

The 7-year loan costs $4,237 more in interest than the 2-year loan. The monthly payment is lower, but you pay for it — literally.

Step 3: Make extra repayments

Most personal loans in Australia allow extra repayments without penalty (check your contract). Extra repayments reduce the principal, which reduces the interest charged, which shortens the loan.

The impact of extra repayments

On a $10,000 loan at 12% over 3 years (monthly payment $332):

• No extra: 3 years, $1,952 interest
• $50/month extra ($382 total): 2.5 years, $1,596 interest — saves $356 and 6 months
• $100/month extra ($432 total): 2.1 years, $1,302 interest — saves $650 and 11 months
• $200/month extra ($532 total): 1.6 years, $883 interest — saves $1,069 and 17 months

Even $50/month extra makes a meaningful difference. If you get a bonus, a tax return, or a pay rise, put it toward the loan.

Check for early repayment fees

Some loans charge a fee for early repayment (often called an "early termination fee" or "break cost"). Check your contract. If there's a fee, calculate whether the interest saved exceeds the fee — for most loans, paying off early still saves money even with the fee.

Step 4: Consider refinancing

If interest rates have dropped, or your credit score has improved, you may be able to refinance your personal loan at a lower rate. Refinancing means taking out a new loan to pay off the old one.

When refinancing makes sense

• Your current rate is significantly higher than what's available now (e.g., you're paying 15% and could get 9%)
• Your credit score has improved since you took out the loan
• You want to consolidate multiple debts into one payment

When it doesn't

• The new rate is only slightly lower — the fees may exceed the savings
• You're near the end of the loan term — most of the interest is already paid, so the savings are small
• You'd extend the term — a lower rate over a longer term can cost more in total

How to decide

Calculate the total cost of your current loan (remaining payments × remaining months) vs the total cost of the new loan (new payments × new term + fees). If the new loan is cheaper, refinance.

Step 5: Avoid the common traps

Borrowing more than you need

Lenders often offer more than you asked for. Don't take it. Borrow only what you need, and no more. Every extra dollar borrowed is a dollar plus interest you have to repay.

Using a personal loan for a depreciating asset

A personal loan for a car that loses 40% of its value in 3 years means you're paying off an asset that's worth less than the loan. If you need to sell the car, you might owe more than it's worth. Consider a shorter term or a cheaper car.

Consolidating and re-accumulating

The biggest risk with debt consolidation: you pay off your credit cards with a personal loan, then run up the credit cards again. Now you have the personal loan AND new credit card debt. If you consolidate, you must commit to not using the credit cards — see our guide to paying off credit card debt.

Extending the term when refinancing

If you refinance a 3-year loan into a 5-year loan, the monthly payment drops but the total cost increases. Only refinance if the total cost is lower, not just the monthly payment.

Step 6: Factor the loan into your budget

A personal loan payment is a fixed monthly commitment. It needs to fit within your household budget alongside your other bills.

• Include it in your bills account. If you're using the bills account system, include the loan payment in your fortnightly transfer.
• Don't take a payment you can't afford. If the loan payment would push your needs above 60–65% of your income, the loan is too large or the term is too short.
• Plan for the end of the loan. When the loan is paid off, redirect the payment to a savings goal — don't absorb it into spending.

Step 7: Track the payoff

Track your loan balance over time. Watching it shrink is motivating, and it confirms you're on track. The Payday Compass app lets you enter your personal loan as a bill with its monthly payment and see it in your runway alongside your other commitments.

Summary

A personal loan is a fixed-term, fixed-rate borrowing tool. To manage it effectively: know your rate and whether it's competitive, choose the shortest term you can afford, make extra repayments to reduce the principal and interest, consider refinancing if rates have dropped, avoid the traps of borrowing too much or re-accumulating debt, and factor the payment into your budget. The key principle: a personal loan has an end date — your job is to reach that date as quickly and cheaply as possible.

To track your personal loan alongside your full financial picture, try the Payday Compass Money Runway.