How do personal loans work?

Whether it’s a surprise expense or a planned project, if you’re thinking about applying for a personal loan, here are some key points to consider

How do personal loans work?

Tying the knot soon? Finally taking that dream vacation you've always promised yourself? Or simply would like to regain control of your debts with one simple loan? Whether it's a surprise expense or a planned project, if you're thinking about applying for a personal loan, here are some key points to consider.


How do personal loans work

Getting prepared

Your credit profile

A healthy credit score and record are key to getting any type of loan, including a personal loan. It shows that you are a responsible borrower, and most importantly, gives the lender confidence that you'll be timely and consistent with your payments.

So, what if you have a poor credit history or no credit history at all? While it can make borrowing more complicated, it's not necessarily a deal breaker. But it's important to know that your credit score can impact the cost of borrowing - i.e. interest rate - so make sure you weigh your options carefully.

Our advice? Let's talk. Our friendly team specialises in helping Kiwis secure personal loans that work within their budget.

Your debt-to-income ratio

Besides your credit history, the lender will also look at your debt-to-income (DTI) ratio. The basic principle is simple: the DTI compares how much you owe against how much you earn. In other words, the personal loan provider will assess how much money you have left from your paycheck, excluding living expenses and current debt payments.

Key components of a personal loan

Interest rate

The lender will offer you an interest rate on the personal loan amount. Usually, this interest rate remains the same for the entire term of your loan, and it';s calculated on the remaining balance at any given time. The bottom line? The faster you pay off your loan, the less you pay in interest. Of course, not all lenders are created equal and interest rates can vary widely. Like to know more about your loan options with LoanSpot? Our handy online calculator can help.


Remember, the interest rate is not the only number you need to know (and agree to). Depending on the lending option you choose, personal loans usually come with set-up and other fees. Once again, the amount of these fees can vary significantly, so it pays to go through every detail before signing up.

Repayment frequency and loan term

As we said earlier, the faster you pay off your loan, the less you'll pay in interest rates. If your budget allows, making higher repayments over a shorter period of time will save you interest, and reduce the total cost of borrowing. The most important thing of course is to choose a repayment amount that you can afford comfortably over a period of time; but if you can, it's a good idea to take debt over the shortest period of time that is affordable.


Financial situations are not static, and yours might change over time - especially if you opt for a longer-term loan. For example, you may have additional funds to put towards repayments. Before you sign on the dotted line, check whether the lender will charge you for that flexibility. Some providers include fees for extra payments or early repayment in full (detail that will be clearly stated in your personal loan agreement, so definitely have look before signing).

Read the written detail

And last but not least: it's really important that you read your personal loan agreement all the way through before you sign it. Debt is an important decision, so know the facts before you sign. If you'd like to talk through your personal loan options, we welcome you to give the team at LoanSpot a call on 0800 666 022 or simply apply here. We're here to help.

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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.