Key personal loan terms you should know

A personal loan can be a great option for financing a big purchase, whether it’s a car, a new kitchen, or a much-needed holiday.

But with so many different options on the market, it’s essential you understand exactly what you’re signing up for. This glossary of key terms may help plug any gaps in your knowledge.

Comparison rate

Lenders are required to show a comparison rate, which shows the true cost of the loan, including interest and fees. This helps you choose the most economical option.

Debt consolidation

debt consolidation loan is where you take out a loan to merge multiple debts. This could be an outstanding credit card balance or other personal loans. Consolidating debt may help reduce the overall amount of interest you are being charged.

Fixed interest rate

If you choose a fixed interest rate, your interest rates and repayments will remain the same even if the official interest rate changes. This option could make budgeting easier, but you may not be able to make extra repayments without a cost.

General purpose loan

A general purpose loan might be for a holiday, a wedding, renovations or something else altogether. You can choose a secured or unsecured loan, but a secured loan will generally increase your borrowing power. General purpose loans can sometimes be ‘re-usable’, meaning the line of credit remains available for different purposes.


An overdraft is a feature linked to a personal bank account that allows you to access funds up to a pre-approved limit above and beyond your balance.

Secured car loan

Taking out a secured car loan means you use the car you are purchasing as security, which entitles you to a lower interest rate. However, the lender may be able to repossess the car if you fail to make the necessary repayments.

Secured personal loan

Taking out a secured personal loan often increases your borrowing power, as it means you have offered your home, car or another asset as security. Failure to repay the loan could result in the lender seeking to take possession of the asset.

Unsecured personal loan

An unsecured loan has not been secured by an asset. This places the lender in a position of greater risk as they have nothing to recover if you default on the loan. For this reason, interest rates are usually higher with unsecured loans.

Variable interest rate

A variable interest rate will change with the market. Variable interest rates can be linked to changes in the Reserve Bank of Australia’s official interest rate, meaning you could benefit if the official interest rate drops, but you could pay more if the official interest rate increases.

Having a good understanding of the key terms makes it easier to select the type of loan that will meet your needs. To ensure you’re getting the best possible rate, alwayscompare loans before making your choice.

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