What is a Personal Loan And How Does it Work?
Table of Contents
A personal loan helps you to have immediate funds to finance lots of important purchases including a surprise engagement ring. It’s also a great option for home repair and DIY projects, and with a lower interest rate than you would have with a standard credit card.
And if you’re stuck with a bunch of high-interest credit card debt, you can take out a personal loan to consolidate the balances, thus removing the hassle of juggling too many monthly payments at once.
But like any financial product, personal loans come with costs — interest, fees, and an impact on your credit file. Understanding how they work before you apply means fewer surprises and a better outcome.
What is a personal loan?
A personal loan is a fixed amount of money you borrow and repay in regular instalments over an agreed period. Unlike a credit card or overdraft, there is no revolving balance — you borrow once, repay on schedule, and the loan is closed. You can use a personal loan for almost any legitimate purpose, from vehicle purchases and medical procedures to home repairs and debt consolidation.
Personal loans in New Zealand can be either secured (backed by an asset like a vehicle or property) or unsecured (no asset required, but typically at a higher interest rate and for smaller amounts).
How do personal loans work?
There are many types of personal loans offered, but they all fall into the category of secured and unsecured.
For secured loans, there is collateral required which are assets that you own that are used to secure the amount you intend to pay back. If you can’t pay back your loan, your lender then uses these assets as default and has the authority to claim them to pay off your loan.
As for unsecured loans, these are more common since they don’t use any kind of asset or collateral. This means that your lender can’t take away assets you own if you don’t pay the loan back.
Just so you know, there are penalties that can result from doing this if you default and directly hurt your borrowing ability and credit score. The costs of borrowing later will be increased dramatically making it nearly impossible to take on loans as a result of defaulting.
In New Zealand, personal loans are regulated under the Credit Contracts and Consumer Finance Act (CCCFA). This means every lender is legally required to assess whether the loan is affordable for you before approving it. They must verify your income, review your expenses, and confirm that the repayments will not cause you substantial hardship. This is a protection for you as a borrower — it ensures you are not taking on more than you can manage.
Is a personal loan bad for your credit score?
The answer is no. If you follow the rules and are careful to repay the loan on time, this can actually improve your overall credit score. Here are some very good reasons why:
The best part of a personal loan is that it’s not bad at all to improve your current credit score just as long as you’re completing monthly payments paid on time and under the agreed terms. With each of these payments paid in full every month on the schedule, you agree to pay back, it will improve and raise your total credit score.
You can damage credit scores by adding a personal loan on top of the debt you already have. This is all due to the amount you currently owe back to lenders and creditors.
Therefore, the higher the ratio of debt-to-income is essentially a mathematic equation that lenders are using to determine your monthly income. In a nutshell, they can see how much you earn, versus what is swallowed by debt can be a risk to your credit score.
How much can you borrow?
Quick Loans offers both secured and unsecured personal loans. Depending on your circumstances and the security available, you can borrow from $800 to $150,000. The amount you are approved for will depend on your income, existing commitments, and the lender’s assessment of affordability.
You should also have a good rating on your current credit score whenever applying for a personal loan. Your future lenders will offer higher credit levels at better interest rates when you have outstanding credit rating scores. But higher credit scores by themselves don’t always guarantee immediate loan approvals as you’ll find out.
Duration of loan
The length of time that you want to borrow determines a couple of important points. The amount you want to borrow and the amount that’s repaid each month also depends on your source of income. It’s common with most lenders to provide prepayment options at fortnightly, weekly, or monthly periods. It also relies on when you’re paid as a regular income that will mirror your loan payments.
Quick Loans offers a loan calculator that lets you model different repayment amounts and terms before you apply. The shortest repayment period starts at six months and can extend up to three years, depending on the amount and your circumstances. Repayment frequency can be set to weekly, fortnightly, or monthly to match your pay cycle.
Quick Loans does not charge early repayment penalties. If your circumstances change and you are able to pay the loan off sooner, you can do so and save on interest.
If you want to talk to us about applying for a loan, please call us on 0800 200 275 or apply online.
This is not legal advice.
Frequently Asked Questions
Q: How quickly can a personal loan be approved?
At Quick Loans, your application is reviewed by a real person and you will typically hear back within 60 minutes during business hours. If approved, funds can be in your account within 24 hours.
Q: Is a personal loan better than using a credit card?
For a specific, planned expense, a personal loan is usually cheaper because the interest rate is typically lower and the fixed repayment schedule ensures the debt is cleared within a set period. Credit cards can be useful for smaller expenses you can pay off in full each month before interest accrues.
Q: What if I am self-employed?
Self-employed borrowers can apply for personal loans. You will typically need to provide evidence of consistent income through bank statements or financial records rather than payslips.
Q: How do I know how much I can afford to borrow?
Use the Quick Loans repayment calculator to model different amounts and terms. As a general guide, your total debt repayments — including the new loan — should sit comfortably within your income after essential expenses. If the repayment feels tight, consider a smaller amount or a longer term.
Q: Can a personal loan help my credit score?
Yes, if you make every repayment on time and in full. A consistent repayment history on a personal loan adds positive data to your credit file, which can improve your score over time.
by Ash Horton
11/08/2021
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.