A cash loan, often referred to as a personal loan, is a type of installment loan where you borrow a fixed amount of money from a lender and pay it back in regular monthly payments (installments) over a set period of time. These loans are typically unsecured, meaning you don’t need to put up collateral like your house or car to get one.
Australian households carry significant debt. As of recent data, household debt to income ratio is over 180% Source: Australian Bureau of Statistics. This highlights the importance of carefully assessing your ability to repay any new loan.
Cash loans are commonly used for consolidating high-interest debt, covering unexpected medical bills, financing home improvements, or managing large purchases.
Here’s a step-by-step breakdown of how they work.
How a Cash Loan Works: A 5-Step Process
- Application and Shopping Around
This is the most critical step. You research and compare offers from different types of lenders, including:
- Banks: Often for customers with strong credit.
- Credit Unions: Typically offer lower rates to members.
- Online Lenders: Provide a fast, convenient application process.
You’ll need to provide personal, financial, and employment information. The most important part of this step is comparing the Annual Percentage Rate (APR), which reflects the true cost of the loan including interest and fees.
- Receiving a Loan Offer and Verification
Based on your application, the lender will perform a hard credit check and present you with a loan offer if you are approved. This offer will detail:
- Loan Amount: The total sum you are approved to borrow.
- Interest Rate & APR: The cost of borrowing the money.
- Loan Term: The length of time you have to repay the loan (e.g., 24, 36, or 60 months).
- Monthly Payment: The exact amount you will pay each month.
The lender will then verify the information you provided (like your income and employment) before finalizing the offer.
- Acceptance and Funding
Once you accept the loan terms, you will sign a legal agreement outlining all the conditions. After signing, the lender will disburse the funds. Funding is usually very fast, especially with online lenders. The cash is typically deposited directly into your bank account, often within one to two business days, and sometimes even on the same day.
- Repayment
Repayment begins according to the schedule in your loan agreement. Your monthly payment will remain the same for the entire loan term. Each payment is split into two parts:
- Principal: The portion that goes toward paying down the original loan amount.
- Interest: The cost charged by the lender for borrowing the money.
Most lenders offer automatic withdrawal from your bank account to make payments easy, but you can usually also pay manually.
- Paying Off the Loan
You continue making payments until the loan balance reaches zero. Once the loan is paid off, the account is closed. It’s important to get a confirmation from the lender that the loan is satisfied. Making all your payments on time will have a positive impact on your credit history.
Key Terms to Understand
- Principal: The original amount of money you borrow.
- Interest Rate: The percentage charged on the principal.
- APR (Annual Percentage Rate): A broader measure of the loan’s cost that includes the interest rate plus any origination fees or other charges. This is the most important number to compare.
- Loan Term: The length of time you have to repay the loan.
- Monthly Payment: The fixed amount you pay each month.
- Origination Fee: A one-time, upfront fee charged by some lenders to process the loan, often deducted from the loan amount before you receive it.
Final Tip: Always borrow responsibly. A cash loan can be a helpful financial tool, but it’s essential to understand the terms fully and ensure the monthly payment fits comfortably within your budget before you sign.
