Compare Personal Loans with a Redraw Facility

Name: Personal Loans With A Redraw Facility
Creator: Savvy
Published: 2021-11-04T13:53:36+10:30

Home > Personal Loans > Personal Loans With A Redraw Facility

It won't affect your credit score.

Written by , updated on October 5th, 2023

What is a personal loan redraw facility?

A redraw facility on a personal loan enables you to withdraw money from any additional payments made previously. What this means is that if you’ve paid a total of $1,000 in extra repayments throughout your loan, you can withdraw up to that amount if you need access to further funds. This flexibility is popular with many borrowers, as it saves them from having to apply for another loan altogether if they end up finding themselves short on money at their disposal.

Another key advantage of personal loan redraw facilities is that you can use them to reduce the interest on your loan sum whilst you’re repaying it. Personal loan interest is calculated daily based on whatever principal remains outstanding on a given day. By making extra repayments, you can actively reduce the interest charged to you and shorten your loan term while making them available to be drawn from for a rainy day.

Some borrowers may prefer to deposit additional funds into a savings account to help accrue interest, but you’re likely to find that the interest you’d earn on those funds in your account is less than the interest you’d save on your loan by depositing it in your facility. You may not even need to redraw across your loan term, but the security of having it there in case you end up needing it is why many choose loans with redraw facilities attached.

How do I use my redraw facility on my personal loan?

The particulars of how to use your redraw facility will vary between different lenders, as each one is unique when it comes to how they run their redraw facilities. However, for the most part, this will function simply: you’ll contact your lender and request to withdraw funds from your facility, which they’ll accept provided it meets their requirements for doing so. Because these are funds you’ve already paid towards your loan, you don’t need to go through an extensive application process to access them.

It’s worth noting that there’ll be a set of minimum criteria imposed on your ability to redraw funds by your lender. First and foremost, some lenders will charge fees for you to make use of your redraw facility, as well as others doing so for submitting additional repayments and paying out your loan ahead of schedule. You should always bear this in mind when selecting your loan, as fees can add up over time if you plan on actively using your facility regularly.

What are some of the limitations of redraw facilities on personal loans?

There are several notable limitations that you’ll encounter when using a redraw facility. For some, it may serve as a temptation to easily access funds whenever you need them, but it’s important to acknowledge the effect this has on your loan. By redrawing from your loan, you’re taking away from some of the hard work put into paying it off, reducing the percentage of your principal that you’ve paid off and potentially lengthening it. By reducing your overall contribution, you’ll also increase the interest you’re required to pay, given that it’s calculated based on your remaining total.

It’s not available on all loans, either. If you have your heart set on a fixed rate personal loan, you might find that your lender doesn’t offer a redraw facility. Variable rate personal loans are generally the only loans that they’re present on.

Additionally, when it comes to withdrawing funds, your lender is likely to restrict the minimum amount you’re able to take out of your extra repayments. In most cases, this will sit at $500, meaning you won’t be able to take out smaller amounts if you’re only looking for a minor cash boost. If your loan comes with free additional repayments, though, there’s nothing stopping you from re-depositing the funds you don’t use.

Types of personal loan

Unsecured personal loans

With an unsecured personal loan, you can potentially borrow as much as $75,000 without the need to attach any valuable assets, such as your car, as security. These loans are the most widely available and often the quickest, with same-day approval possible.

Secured personal loans

Secured personal loans, on the other hand, make use of collateral. This lowers your risk profile in the eyes of a lender, potentially lowering your interest rate and expanding your borrowing power beyond what you may be able to get through an unsecured loan.

Variable rate personal loans

Variable interest rates remain open to fluctuation during your term. This means you can benefit from decreasing rates and save on your loan if the market heads in that direction, although you’ll also pay more if rates start rising.

Fixed rate personal loans

Fixed interest rates are locked at the beginning of your loan and remain constant throughout your repayments. This acts as a valuable protection against interest rate increases, as your loan will be unaffected, but you’ll miss out on potential drops as well.

Debt consolidation loans

If you’re paying off multiple debts at the moment, particularly those with high interest (such as credit card debts), consolidating them into one payment can not only make them more convenient to manage but also potentially save you money overall.

Travel loans

Looking to take off on a holiday with your family but want to pay it off at your own speed? Travelling can be expensive, so you can distribute the cost of your next trip over a period you’re more comfortable with by taking out a personal loan to pay for it.

Wedding loans

There are so many costs that go into making your dream wedding a reality, from venue hire to catering to dresses and suits and so much more. By taking out a personal loan, you can start planning the big day you want, even if you can’t pay for it upfront.

Renovation loans

Home improvements are desirable for a range of homeowners to help keep their living space fresh and interesting, not to mention increase its value. You can get past the financial hit of renovations with a personal loan paid in instalments.

Self-employed loans

Personal loans aren’t limited to PAYG employees, though. If you’re running your own business, you can still be approved for financing by submitting tax returns and other alternative documents instead of payslips and utilise your funds however you wish.

Student & education loans

There’s a variety of expenses which come with being a student, ranging from the cost of your courses, textbooks and computer to your accommodation. Taking out a personal loan can make these costs more manageable by spacing them out.

Green loans

Some lenders offer green personal loans, which are designed to be used for energy-efficient appliances and products such as solar panel and air conditioning installation in your home. You can qualify for lower interest rates and fees with this loan.

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The pros and cons of a redraw facility on your personal loan

PROS

Access funds when you need them

Enjoy the flexibility of being able to withdraw extra money when you need it without the rigmarole of applying for financing.

Pay out your loan earlier

In providing potential funds for your future self, you’re also actively paying down your loan faster and saving on interest.

Lump sums available

Whether you’re depositing or withdrawing, you can take out larger amounts to cover steeper expenses you can’t quite afford.

CONS

Fees may apply

You’ll always need to check that your lender doesn’t charge fees for the use of their facility, as these could end up costing a significant amount.

Increasing interest by withdrawing

Each time you withdraw, you increase the amount you owe on your loan, thus raising the interest you’ll be charged on your next payment.

Redraw restrictions

You may not be able to redraw the amount you’re looking for and instead are forced to take out more than you need.

Common queries about personal loans with a redraw facility

Can I redraw money if I haven’t made additional repayments?

No – redraw facilities can’t be used for withdrawing non-additional contributions made to your personal loan. Once you repay the minimum amount in a given month, that money goes directly to your lender and can’t be accessed again. The idea of a redraw facility is to give you flexible usage of the non-essential payments, rather than all of them.

Should I refinance my loan if I need to access more funds?

If you’re looking to gain access to a larger sum of money beyond what you have available in your redraw facility, a personal loan refinance might be an option for you. This involves applying for a new loan with a different lender to pay off your current one and service your remaining debt on updated terms. One potential use for a refinance is to expand your loan amount and lengthen your term, which can come in handy if you need to borrow more money.

Am I able to apply for a second personal loan?

Yes – provided you can afford to do so. Whether you can take out multiple personal loans depends on how reliably you’ve been able to repay your current one and your overall disposable income. If you’re earning enough to support the repayments of a second loan, you can be approved to do so. It’s important to note that you’re unlikely to receive as strong a deal on your second personal loan, given that you’ve taken on more debt and your disposable income is likely lower than what it was on your first loan.

Do personal loans with a redraw facility come with a higher interest rate?

Not necessarily – however, you should always be thorough when comparing different offers. Some lenders may charge a premium for enabling you the flexibility to make extra payments and redraw them. At Savvy, we break down each personal loan so that you can assess them on their merits in areas such as interest rates, fees and available features. By comparing with us, you can save more on your loan.

Do I need to provide security for my loan?

No – redraw facilities apply to both secured and unsecured personal finance, giving you the choice between the two based on which suits you better. You may wish to take advantage of the increased borrowing range and lower interest rate of a secured loan, while an unsecured loan may be the fast and uncomplicated option that you’re looking for.

Is my information safe with an online lender?

Yes – online lenders are required to have safety measures in place to protect the information of their borrowers. They utilise highly encrypted systems to house this information and prevent it from being taken and released. What all of this means is that your private details are safe when you disclose them through your online loan application.

Should I use an overdraft instead of a redraw facility?

An overdraft is another option commonly used by Australians, particularly businesses, to provide easy access to additional funds when needed. These are attached to your bank account, enabling you to be approved up to a certain limit and withdraw whatever you need, whenever you need it. However, these are generally useful for smaller amounts that can be repaid promptly, as outstanding balances incur high interest rates.

Does a redraw facility affect my credit score?

It can – if you deposit funds into your facility and don’t use them, your credit score will benefit from you paying your loan off promptly. Even if you redraw the full additional amount that you’ve contributed, you’ll still be on pace with your repayments, meaning it won’t harm your score.