What are Personal Loans and how are they Calculated?


Personal loans serve as versatile financial tools that provide individuals with access to funds for various purposes, ranging from debt consolidation to home improvements, medical expenses, or unexpected emergencies. With that said, let’s delve into the fundamentals of personal loans, exploring what they entail and how they are calculated. 

What are Personal Loans? 

Personal loans are unsecured loans, and as such the interest rates are unusually higher than secured loans. They are essentially provided by financial institutions, such as banks, credit unions, or online lenders, to individuals based on their creditworthiness. Unlike secured loans, which require collateral (such as a house or car) to secure the loan, personal loans are not backed by any collateral. Instead, lenders rely on the borrower’s credit history and financial stability to assess their ability to repay the loan. 

Key Features of Personal Loans: 

  • Unsecured Nature: Personal loans do not require collateral, making them accessible to borrowers who may not have assets to pledge as security. 
  • Fixed Loan Amount: Borrowers receive a lump sum of money upfront, which they repay over a specified period through regular instalments. 
  • Fixed or Variable Interest Rates: Personal loans may have fixed or variable interest rates. Fixed rates remain constant throughout the loan term, providing predictability, while variable rates may go up or down based on market conditions. 
  • Repayment Period: Personal loans have predefined repayment periods, typically ranging from one to seven years. Borrowers typically repay the loan through monthly instalments until the loan term expires. 
  • Purpose Flexibility: Personal loans can be used for various purposes, including consolidating debt, funding home renovations, covering medical expenses, or financing major purchases. 

How Personal Loans are Calculated: 

Several factors influence the calculation of personal loans, including your credit score, income stability, and debt-to-income ratio. 

Your credit score is one of the areas with the most impact on the calculation as your credit score is essentially how trustworthy you are in terms of repayments. Many different things can have an impact on your credit score, such as credit cards, home loans, and scheduled payments, giving lenders an idea of how much they can trust you to repay the loan. 

Lenders also look at your income and employment history to make sure you can afford the repayments on your loan. If you have a steady employment history with a nice income, you will be much more attractive to lenders than someone with large, frequent gaps in their employment history. 

Similarly, if you are struggling to keep up with your current bills and repayments, it’s likely that you will have a high debt-to-income ratio and you may be declined. While lenders have in the past, they can no longer provide a loan to someone they do not believe is able to afford it by law. 

Finally, the loan amount and term can also influence the calculation of personal loans. Generally, the larger the amount or the longer the term, the higher the interest rate will be. This is to compensate for the increased risk to the lender. 

Why use a Broker? 

By having an experienced broker, such as a Glass Broker, in your corner, you are able to easily track down the very best deal and find the perfect conditions to suit your wants and needs, all while saving valuable time. Without a broker, you may be spending lots of time trying to find the right deal, only to end up getting caught out by the fine print and finding out the deal was too good to be true. 

So, if you’re thinking about applying for a personal loan, the first step should be to speak with the experienced and professional team at Glass Financial. We will help you find the perfect deal to suit your unique situation, all whilst giving you the knowledge needed to make informed decisions. 

Speak with us today on 1300 245 277 or send an email to [email protected]  


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