A personal loan lets you borrow an agreed amount of money and repay it over a set period, usually through regular weekly, fortnightly or monthly payments. Personal loans in New Zealand can be used for a wide range of purposes, but the interest rate, fees, repayment amount and lending criteria can vary considerably between loans. Understanding those differences is important before deciding how much to borrow or which finance option to use.
Key takeaways
- ✓Personal loans provide a lump sum that is normally repaid through regular instalments over an agreed term.
- ✓Personal loans can be secured or unsecured, depending on the lender and loan structure.
- ✓The rate available to you can depend on your credit history, income, expenses, existing debts and other circumstances.
- ✓A smaller regular repayment does not necessarily mean a cheaper loan because longer terms can increase total interest.
- ✓Compare fees and the total amount repayable as well as the advertised interest rate.
- ✓Lenders must comply with New Zealand consumer-credit requirements when providing consumer loans.
What is a personal loan?
A personal loan is a form of credit where you borrow an agreed amount and repay the debt according to a credit contract. Unlike a credit card or revolving credit facility, a personal loan will commonly begin with a defined amount borrowed and an agreed repayment schedule.
A personal loan generally gives you a lump sum upfront, which you then repay with interest and any applicable fees over the agreed loan term.
What can a personal loan be used for?
Personal loans can potentially be used for many different purposes. The uses accepted depend on the lender and finance product, so borrowers should be clear about why they are borrowing when applying.
| Possible use | Examples |
|---|---|
| Home expenses | Renovations, furniture or household purchases |
| Major purchases | Equipment or other significant one-off expenses |
| Travel | Eligible travel-related costs |
| Events | Weddings or other major events |
| Debt consolidation | Replacing eligible existing debts with a new loan |
| Unexpected expenses | Certain significant costs that cannot be covered from savings |
How does a personal loan work?
After a loan is approved and the agreement is completed, the borrower receives or has access to the agreed funds. The debt is then repaid according to the repayment schedule in the credit contract. Each repayment can include principal, interest and, depending on the loan, applicable fees.
How much can you borrow with a personal loan?
There is no single amount that every New Zealand borrower can access. Lending limits vary between providers, and the amount available to an individual depends on the lender's assessment and the finance product.
The maximum advertised loan size is not necessarily the amount you personally can or should borrow. Your circumstances and the lender's assessment determine what finance may be available.
What do lenders look at when you apply?
A personal-loan application is assessed using information about both the borrower and the proposed loan. The exact process differs between lenders.
| Area | What may be considered |
|---|---|
| Income | Money available to support repayments |
| Regular expenses | Existing household and living costs |
| Existing debt | Current loan and credit commitments |
| Credit history | Previous management of credit |
| Loan amount | How much you are asking to borrow |
| Loan purpose | What the money will be used for |
| Security | Whether an acceptable asset secures the debt |
What is the difference between a secured and unsecured personal loan?
A secured personal loan uses an asset as security for the debt. An unsecured personal loan does not require a specified asset to secure the loan. This difference can affect lender risk, rates and loan conditions.
| Feature | Secured personal loan | Unsecured personal loan |
|---|---|---|
| Asset used as security | Yes | No specified security |
| Lender risk | Reduced by acceptable security | No secured asset as a fallback |
| Interest rate | Can be lower | Can be higher |
| Asset at risk under the contract | Potentially | No asset specifically secures the debt |
How do personal loan interest rates work?
Interest is one of the main costs of borrowing. Personal-loan rates vary by lender, product and borrower. Some lenders advertise rates beginning at a particular percentage, but that does not mean every approved applicant will receive the advertised minimum.
What can affect your personal loan rate?
The rate offered can reflect factors such as your credit history, financial position, whether the loan is secured, the amount borrowed and the lender's own pricing. This is why two people borrowing the same amount can potentially receive different finance terms.
Treat an advertised starting rate as a reference point rather than a guaranteed rate for your application.
How are personal loan repayments calculated?
Your repayment is influenced by the amount borrowed, interest rate and loan term. Borrowing more generally increases the repayment, while extending the term can reduce each scheduled payment by spreading the debt across a longer period.
Example personal loan repayments
The following examples use an illustrative interest rate of 9.95% p.a. over five years. They exclude fees and are intended only to demonstrate how the amount borrowed affects repayments.
These figures are repayment examples rather than loan offers. Your actual repayment depends on the rate, fees, term and finance available to you.
| Amount borrowed | Example rate | Term | Approx. weekly repayment |
|---|---|---|---|
| $5,000 | 9.95% p.a. | 5 years | $24 |
| $10,000 | 9.95% p.a. | 5 years | $49 |
| $15,000 | 9.95% p.a. | 5 years | $73 |
| $20,000 | 9.95% p.a. | 5 years | $98 |
| $30,000 | 9.95% p.a. | 5 years | $147 |
Should you choose the lowest personal loan repayment?
Not automatically. A lender can reduce the regular repayment by spreading the debt across a longer period. While that can improve short-term cash flow, the longer repayment period can result in more interest being paid overall.
Why the loan term matters
Consider how quickly you want to repay the debt as well as what you can comfortably afford each week or month. A shorter term generally requires larger repayments but can reduce the time during which interest accrues. A longer term generally does the opposite.
What fees can apply to personal loans?
Interest is not necessarily the only cost. Depending on the lender and loan, establishment, administration, variation, default or early-repayment costs may apply. New Zealand consumer-credit rules regulate how lenders disclose and charge applicable fees.
| Potential cost | What to check |
|---|---|
| Establishment fee | Whether a fee applies when the loan is created |
| Administration fees | Whether ongoing account charges apply |
| Default costs | What may happen if repayments are missed |
| Variation fees | Potential costs for agreed changes to the contract |
| Early-repayment costs | What may apply if you clear the loan early |
Personal loan vs credit card
A personal loan and credit card provide credit in different ways. A personal loan generally provides a defined amount with a repayment schedule, while a credit card provides revolving credit up to an approved limit. Which structure is appropriate depends on the purpose, cost and how the debt will be repaid.
Personal loan vs overdraft
An overdraft allows an eligible bank account to move below zero up to an agreed limit. A personal loan instead provides a defined loan balance with scheduled repayments. For a known one-off expense, the predictability of a personal-loan repayment schedule can make the cost easier to understand, although the actual rates and fees still need to be compared.
Can you use a personal loan for debt consolidation?
A personal loan can potentially be used to consolidate eligible existing debts. This involves replacing those debts with new finance. Consolidation can make repayments easier to manage, but it does not automatically make debt cheaper.
Before consolidating debt, compare the new interest rate, fees, loan term and total amount repayable with the debts being replaced.
How to compare personal loans properly
Comparing loans on the advertised rate alone can hide important differences. Use the same amount and a similar term where possible, then compare the complete cost.
| Compare | Why |
|---|---|
| Actual interest rate | Shows the rate applying to your finance |
| Fees | Can materially increase borrowing costs |
| Loan term | Affects repayments and total interest |
| Regular repayment | Needs to fit your budget |
| Security | Shows whether an asset is tied to the debt |
| Total amount repayable | Provides a broader measure of overall cost |
What should you check before accepting a personal loan?
Read the credit contract and disclosure carefully before proceeding. Make sure you understand the amount borrowed, interest rate, fees, repayments, loan term, security arrangements and what can happen if repayments are missed.
Can you repay a personal loan early?
Consumer borrowers can repay a loan in full before the scheduled end of the agreement, although reasonable early-repayment costs can apply depending on the contract. If you are considering doing this, ask the lender for a current settlement figure rather than estimating the amount from your remaining repayments.
What if your circumstances change?
If you begin having difficulty making repayments, contact the lender as early as possible. Depending on your circumstances and the credit contract, there may be options to discuss payment arrangements or financial-hardship assistance.
Compare personal loan options
Personal-loan rates and terms can vary between lenders and borrowers, so comparing suitable options can help you understand the differences in cost and structure. EveryLoan refers visitors to Simplify Finance, where applications, lender matching, credit decisions and funding are handled by Simplify Finance and its lender partners.
EveryLoan is not a lender. Actual rates, approval, loan amounts and terms depend on the lender and your individual application.
Frequently asked questions
A personal loan generally provides an agreed amount of money that is repaid through scheduled payments over a set term, together with interest and any applicable fees.
Depending on the lender, personal loans can potentially fund purposes such as household purchases, renovations, travel, major expenses or eligible debt consolidation.
Loan limits vary by lender, and the amount available to you depends on the lender's assessment of your circumstances and the proposed finance.
A secured personal loan uses an acceptable asset as security for the debt. An unsecured personal loan does not require a specified asset to secure the loan.
Rates can depend on the lender, your credit history, financial circumstances, loan amount, term, security and other factors considered during the application.
Available loan terms vary between lenders and products. Compare how different terms affect both the regular repayment and total borrowing cost.
Full early repayment is possible for consumer credit, although reasonable early-repayment costs may apply. Ask the lender for a settlement figure before paying the loan out.
Not necessarily. Rates, fees and repayment structures differ between products. Compare the actual cost of the options available rather than assuming one type of credit is always cheaper.