You won’t be surprised to hear that personal loans are not all about getting that house extension or that dream vacation. They need to be paid back!

But that's not the only "disadvantage"! Before you decide that a personal loan is going to give you what you need, consider the following:

Potentially High Interest Rates

Unsecured personal loans especially nearly always have high interest rates because they represent a higher risk to the lender. If you opt for a secured loan the risk is less so the interest will usually be less (for example a mortgage may be around 6-7%, but for an unsecured personal loan it will be closer to 10-15%)

High Costs Overall

Taking into account both the high interest rate and the fees, the overall cost of the loan is usually very high, especially an unsecured loan.

Personal Loan Interest Payments are Non Tax Deductible

Unlike other loans, interest on unsecured personal loans is usually non tax deductible, adding to the overall cost.

Low Flexibility in Interest Rate and Loan Term

Personal loans are usually arranged to be repaid in full at the end of the set loan term and the interest rate is usually fixed, unless they are designed to work like a revolving line of credit. In most cases, unlike with mortgages, there is not the option of a variable rate so buyers cannot take advantage of any interest rate cuts.

Ensure You Are Borrowing from a Licensed Creditor

The first thing you will need to check before applying for any personal loan is that the credit provider you are dealing with is licensed or registered, as required by the National Credit Law of July 2010.

The Australian Credit Services Register allows you to check whether your proposed lender already has a license or has applied for a licence, or you can phone ASIC’s Infoline on 1300 300 630.

Applying Online

If you have compared personal loans smartly, identified one that works well for you and made up your mind to proceed, you will usually be directed from your personal finance site like LowerBills to a secure server with the credit provider in question, where you can make the initial application online. You will need to provide details concerning your ID and your financial situation.

Read the Fine Print

The credit contract you will sign when taking out a personal loan will include all the details of the loan including amount borrowed, interest rate, fees and charges, schedule of repayments and the term. Make sure you read it all carefully, including the fine print and terms and conditions.

One alternative to a personal loan that some Australians use, when they need extra cash quickly, is to borrow off a friend or relative; this, like a personal loan, is not something to be taken lightly and just as much thought needs to go into it, to avoid things turning sour – and not just financially!

Because an unpaid loan can create problems financially and relationally between family members it's important, before you go down this path, to understand that you should treat a loan to or from a family member much as you would a standard bank loan – but probably with a far lower interest rate attached. Here are some general guidelines on how to do this to avoid future problems:

• Research current interest rates and make sure you know what the Australian market rate is. You don’t have to use this rate but it's good to use as a benchmark. The interest rate that will be applied will probably depend on the relationship and how generous the lender can afford to be with regards to all aspects – lost interest earnings on other investments, tax implications etc. There is usually a minimum interest rate that needs to be applied in order for a payment to be considered a loan rather than a gift – check what this is.
• Make sure both parties are satisfied with the loan term and payment schedule. A problem for one party usually means a problem for both parties so it's in both of your interests to work out realistic terms for the loan.
• Use a Contract. This is a very important step that can save unnecessary problems in the future with both the loan and taxation. It needn't be complicated but having a written agreement drawn up by a lawyer, which covers you both legally and details the borrowing arrangement, is essential for both parties' peace of mind. If you prefer you can just have your lawyer create a promissory note that outlines how much money was lent, the agreed interest rate, how long the loan period is and the repayment schedule. Having such terms and conditions in writing gives both parties a valuable reference point and structures the loan clearly, formally.
• Find out how both parties will be affected when it comes to Taxation before committing, as the regulations may not be the same as for normal bank loans. When the time comes to file your tax returns both borrower and lender will need to include the documentation from the loan and, if you are not sure, you can check with your accountant or taxation agent so that it everything is filed correctly. Bear in mind that gift payments usually have different tax ramifications to loans.
• Keep it Business-Like. It's easy to fall into the trap of thinking that family members won't mind late payments but the best way is to not put this to the test. Treat the loan as a business arrangement and you won’t fall into this way of thinking.
• If you are asked to Lend Money only do it if you are in a position to do so. Never lend money to a family or friend because you feel pressured into it, as it will only create later problems when you will be chasing it up. Make sure you are fully across your own finances and how it will affect your savings, your credit rating and your tax situation before lending money to anyone.
• Never Sacrifice a Family Relationship or a Friendship Over Money. If there is one golden rule about family or friend loans then it's this. Problems can be talked through in an adult and responsible way and, if relationships do become strained, consider using a mediator from the family or circle of friends to help, as often things can be seen clearer from the outside.

Some personal loans need extra thought before signing on the dotted line because they involve extra risk for you, the borrower. Here's a couple to be particularly wary of:

Unsecured Pay Day Loans

A pay day loan is really a cash advance and will typically be short term (14 days or so) and high interest. Often it is repaid by direct debit once you receive your next paycheck or sometimes by personal check that is written at the time of loan application and held until repayment date. It is attractive to many who are strapped for cash because it can usually be approved quickly with the minimum of documentation and sometimes without a credit check. This means it may be authorized within hours as it is low risk to the lender.

The drawback of these loans is that they come at a high rate of interest (equivalent to 300% APR or more) and there will also be a lenders fee to pay. There are extra fees if the loan needs to be extended and, if this happens several times, the fees can be significant and present a problem, so if you take one of these loans make sure you will pay it back on time first time.

Often a short-term loan from friends or an advance from an employer is used as an alternative to these payday loans, because of the potential problems they can cause.

Car Title Loans

These loans, instead of being secured against a personal check or direct debit arrangement, are secured against your car. The amount you can borrow is based upon the value of your car. They are similarly low risk to payday loans for the lender, who may be able to repossess your vehicle if you default on the loan. For the borrower they are usually used in emergency situations when cash is need quickly with the minimum of fuss.

The loan period may be relatively short – around 30 days or so - and the interest rate will be high, equating to an APR of 300% or more.