Personal Loans

Daniel Brown

Financial ExpertUpdated on May 3, 2022

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Do you need a quick cash influx for essential and unexpected expenses? If your budget is tight and you don’t have enough savings to tide you over, a personal loan may be a practical option for you. 

This article discusses important information about personal loans, such as reasons for applying for a loan, how to choose one that’s right for you, and the various choices lenders may offer. 

The article also gives tips on suitable personal loans and different ways of managing repayments. It also discusses the amount of money you could borrow should you wish to proceed with your application. 

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What Is a Personal Loan?

A personal loan or debt allows you to borrow a lump sum of money. It can be repaid in instalments with interest, or over a fixed period at a fixed interest rate.

A personal loan lets you know the exact duration of your debt, provided you meet your monthly repayments. It’s different from an overdraft, which is an ongoing credit increase with no fixed repayment terms. 

Depending on the lending institution, borrowers can have a wide range of personal loan options up to $50,000 or $100,000. Interest rates, repayments, and other fees vary depending on the personal loan amount. 

If you take out a personal loan, the lender will charge you a loan establishment fee once the borrowed money is deposited into your nominated bank account. 

Reasons for a Loan Application

Several types of personal loans are available.

1. Debt Consolidation

You can use a personal loan to consolidate your debts. Refinancing or debt consolidation may help you manage your repayments more easily. However, if the interest rate or fees are higher than before, this method may be more costly. 

Below are a few tips before you decide to consolidate:

  • Don’t trust companies that give you unrealistic promises

There are companies that advertise they can get you out of debt regardless of how much you owe. Such a promise is dangerous and could get you deeper into debt if you’re not discerning. 

Avoid companies that:

  • Do not have a licence
  • Ask you to sign blank documents
  • Refuse to discuss repayments
  • Rush the transaction
  • Refuse to give details about the interest rate and the cost of the loan before you sign 
  • Arrange a business loan even if it’s clear that you only need a primary consumer loan 

An Australian financial services licence (AFSL) is given by ASIC to individuals or companies, allowing them to legally operate a financial service business in Australia. 

Dealing only with licenced businesses ensures free access to dispute resolution services if things go wrong. 

Still, an AFSL does not mean that ASIC endorses a company. An Australian credit licence simply means the business meets the basic standards, such as compliance, training, insurance, and dispute resolution process. 

Make sure you’re dealing only with a legitimate company. Search for them on ASIC Connect’s Professional Registers. If they’re not listed as a credit registered person, credit representative, or credit licensee, it means they’re operating illegally. 

You should also review the product disclosure statement (PDS). This document provides information about the financial product’s fees, features, benefits, risks, commissions, and the complaints handling procedures. 

  • Make sure you can afford the new repayments 

Before switching to a new loan, compare fees, interest rates, and other costs against your current loan. Also, check the legal fees, application and valuation charges, and early repayment fees. 

  • Protect your other assets

You may consider turning your unsecured personal loans or credit cards into a single secured debt. However, you need to have collateral. So, consider other options first if you don’t want to put your assets at risk.

If you’re having difficulty paying your mortgage, talk to your lender as soon as possible. They may be able to reduce or pause your personal loan repayments or change your payment terms for easier management. 

You may also reach out to your credit provider to adjust your credit card repayment or extend your loan. At this point, it’ll be a good idea to seek the expertise of a financial counsellor or a legal adviser to get you back on track. 

2. Home Renovation 

If you plan to renovate your house but don’t have enough cash available, consider borrowing money from a lender. There are different ways to fund a home makeover:

  • Personal loans (also referred to as home improvement loans) 
  • Credit cards
  • Refinancing home loan to access home equity
  • Redrawing from current mortgage
  • Using funds from the offset account 

The total amount of your home renovation project will be based on how you decide to fund it. 

A personal loan has a lower interest rate than credit cards. This is particularly true if you take out a secured loan that keeps the long-term costs of borrowing money to a minimum.  

Using a personal loan can also minimise the time spent paying back the debt, meaning less total interest is paid. 

Meanwhile, accessing funds from your home loan’s redraw facility can mean paying more interest in the long run. The loan amount will be paid back over your home loan’s term, which is much longer than a personal loan. 

3. School Tuition

Student loans help students pay for university tuition and other fees, such as living expenses. 

Growing your personal savings to pay for college may still be a challenge even with a part-time job. In this case, a student loan from a public or private financial institution may be the best way to afford higher education. 

Applying for a student loan can be seen as a long term investment in your financial security. Investing in a degree that improves your job opportunities in the future could increase your chances of becoming financially stable. 

Much like all personal loans, the eligibility criteria for an educational loan in Australia depend on your preferred lender. 

The basic requirements for a student loan are meeting the minimum age and having a specific residency status. Some lenders also ask for a good credit rating and minimum annual income. 

If you aren’t an Australian citizen, consider reaching out to your preferred lender to know which loans are applicable to international students studying in Australia. You can also visit www.studyassist.gov.au for more information.

Make sure to scrutinise the lending criteria carefully. Check if they provide for international students or non-permanent residents. 

The features of a student loan include secured and unsecured personal loans, tranche funding, and a loan term (usually between two and five years).

With tranche funding, lenders release your funds in portions throughout your course’s length.

Lenders may give you flexibility with your repayment schedule. To help you with budget planning they give you the choice of monthly or fortnightly (paying the equal half of your monthly fee every two weeks) payments. 

4. Medical Procedures 

Health insurance and government support is helpful, but it may not cover all medical expenses. 

For example, being in a road accident could lead to prolonged healthcare, and worrying about paying for them may delay your recovery.

A medical loan provides funds for medical purposes like major surgical procedures. The loan can help cover other medical necessities, including medication and equipment. 

5. Getting Married

According to MoneySmart, an average wedding in Australia can cost as much as $36,000. It was also found that 82% of Australian couples dipped into their savings account to finance their marriage. Another 60% applied for a loan, and 18% used their credit cards..

Getting married is a momentous occasion that comes with obvious stress. Even with a strict budget, there may still be a shortfall in what you have at hand. Therefore, a wedding loan could be a viable option. 

Expenses can add up quickly when planning a wedding. Should you decide to take out a loan to cover the total amount, be sure you have the means to meet the loan repayments. 

Common wedding expenses include:

  • Venue
  • Catering
  • Photography and videography 
  • Music and entertainment
  • Decorations and floral arrangements
  • Hair and makeup
  • Clothing and accessories 
  • Wedding rings 
  • Hotel accommodations 
  • Car rental 

Budgeting can be overwhelming, so start making a list of expenses as early as possible. Call vendors directly and ask for quotes on their services and shop around for the best deals.

Next, do your calculations to decide whether to take out a personal loan, or use your credit card. Either way, make sure to plan how you will settle the repayment amount within a reasonable time frame to avoid excess charges.

Note that the debt you bring into your marriage typically remains your own. However, personal loans taken out while married are subject to state property rules in divorce. 

6. Veterinary Expenses

Some lenders offer a veterinary loan to cover veterinary bills. You can also use the veterinary loan to pay other pet-related expenses. 

Non-bank lenders are usually the ones that provide such loans. The lender may directly pay the vet bill on your behalf. You just need to repay them over the loan term. 

However, some pet owners prefer to pay it themselves after receiving the money from the lender. In this case, a general personal loan accessible from many banks may be more suitable for them. 

7. Buying A Car

The car loan market in Australia is very competitive, so there are various loan types and lenders available. 

If you’re considering getting a car loan, you can use a comparison website, transact with a car dealer or finance broker, or go directly to your preferred lender. 

A car loan will cover:

  • Interest rate 
  • Interest type
  • Loan size
  • Loan term
  • Loan type
  • Loan repayments
  • Loan fees 

You can choose a secured or unsecured loan. In a secured loan, the bank uses one of your assets, usually a vehicle, as a security against your personal loan. 

An unsecured loan enables you to borrow outright after the lender considers your finances. 

Under a secured loan, the bank may take your car as collateral, should you fail to meet your repayments. The collateral that the bank holds is why this type of personal loan has a lower interest rate. 

Do your research to find the car loan that suits your financial situation. It would also help if you first determine the type of loan you want and the features that you need. 

After finalising your decision, use comparison tools, such as a personal loan calculator or a table to narrow down your options. 

Just because a bank offers the cheapest loan (with the lowest advertised rate), it doesn’t mean that’s the best option for you. So, look at the comparison rate to help you gauge the exact loan amount you need. 

Comparison rates let borrowers know the real cost of the loan. ASIC’s (Australian Securities and Investments Commission) MoneySmart provides a detailed explanation in the below table:

LoansInterest RateChargesComparison Rate
Car loan 1 8%0.5%8.5%
Car loan 28.25%0.1%8.35%

In this example, although Car Loan 2 provides a higher advertised rate, it will actually cost you less. Note that your lender may charge you a higher interest rate on a flexible loan with a redraw facility. 

Use a calculator before submitting your online application. Doing so will minimise the risks of rejection that can potentially impact your credit history. 

The bank will check your credit history during the application process to determine your borrowing power. So try to boost your credit score before you apply for a loan. 

Prepare your personal identification documents like a driver’s licence, passport, billing statement, proof of income, copies of bank statements, and credit card statements. You will also need to provide information about the car you want to buy.

8. Going on a Holiday 

Making regular savings in your bank account for vacation trips is helpful. However, if you’re looking to finance a more expensive getaway, a holiday loan can bridge the gap between what you need and what you’ve saved. 

There are many different financial products available for a holiday loan. Therefore, start making different comparison rates to get the best deal. 

Lenders will scrutinise your ability to repay. So, do your budgeting to ensure repayment is feasible within the time frame agreed. Also, check out variable rate personal loans and the fixed-rate interest deals to know what best fits you. 

With a fixed-rate personal loan, you know exactly how much the monthly fee is. However, with a variable rate, your payment fee may fluctuate depending on the movement of the market interest rate. 

9. Dental Work 

A dental loan is generally a personal loan designed to pay for dental work. This loan can finance various dental procedures, such as general and cosmetic dental and orthodontic treatments. 

You should be at least 18 years of age to be eligible for a dental loan. You must be an Australian citizen or permanent resident and meet certain income requirements. 

You may take out a dental loan to pay for the entire cost of your dental procedure or use it along with your private health insurance. 

10. Cosmetic Surgery 

Standard cosmetic surgery procedures, such as rhinoplasty, liposuction, and facelifts, can cost thousands of dollars. However, most health insurance policies won’t cover the cost of cosmetic procedures unless they are medically necessary. 

If your provider doesn’t cover any portion of your surgery costs, consider taking out a personal loan.

However, check comparison rates first to know how much you can borrow. Also, determine how much the interest rates and repayments will be. 

What to Look for in a Personal Loan

Once you’ve chosen the type of personal loan that fits your borrowing needs, consider its features and interest rate.

  • Interest Rate 

Loan interest rates are calculated as a percentage of the money you borrow. Two types are available: fixed interest rate and variable rate. 

With a fixed-rate loan offer your interest rate remains the same for the life of your loan. While this makes it easier to budget repayments, a fixed-rate loan often comes with exit fees if you opt for an early payout. 

A variable interest rate loan can put you at risk if your lender hikes up the interest. Nonetheless, this loan often comes with lower rates and charges and has more flexible features.  

Interest rates vary depending on your personal circumstances. The rates also take into account your credit score. 

  • Extra Repayments  

With loan features, such as free additional repayments and a flexible repayment schedule, you can choose an early payout of your loan and save on interest. 

  • Redraw Facility

Often seen in variable rate loans, a redraw facility allows you to access extra repayments you may have made on your loan. You can also withdraw a fraction of the amount already contributed as loan payments.

A redraw facility is like an emergency fund at your disposal in case of unexpected expenses. You may use it for car repairs, medical bills, home refurbishment and the likes.

Making extra repayments a few times each year allows you to manage your funds more easily. Your extra repayments will reduce your loan amount and the interest you’re paying. 

  • Flexible Repayment Frequency 

With this feature you’ll be able to tailor your repayments to your regular pay schedule. If your employer pays you fortnightly, you match it with fortnightly loan repayments. 

Personal Loans Choices: Get One That’s Right for You

There are many personal loan choices to choose from. The best personal loan is the one that suits your borrowing needs. So, do your research, shop around, and compare different options and features. 

Consider the interest rates and the security (collateral). If you only need a small personal loan to buy a few essentials, check if you can get a no-interest, or low-interest loan. This type of debt has a low-interest rate, no charges, and gets approved quickly.  

More importantly, decide if you want to get a fixed rate or variable rate personal loan. Fixed rate loans have the same repayments throughout the life of the loan, even if rates increase. Meanwhile, with a variable rate personal loan, you can opt for early or extra repayments to pay off the loan faster.

Several lenders provide lower interest rates for borrowers who have a loan guarantor. Before choosing a  guarantor, make sure you both understand the risks involved.

If you  think you’re ready to apply for a personal loan, here are steps to guide you through the process.

1. Identify the Reason Why You Need a Personal Loan

Before you start researching the best personal loan for you, think about your purpose for getting one and how you want to access the fund. 

The amount of money for a personal loan is released all at once. If you find it difficult managing your money, it may not be the right option for you. 

2. Compare Different Types of Personal Loans  

The eligibility criteria for a personal loan aren’t always clear cut. Therefore, it’s essential to shop around and compare your options until you find the right personal loan for you. 

By doing your research you can determine if you meet the eligibility requirement before applying. You can also avoid rejection and strikes on your credit report. 

Comparing your options ensures you’re getting the right personal loan. You can view your loan’s total amount and avoid paying for features you don’t need. 

When comparing personal loans look for the lowest personal loan interest rate that will save money in the long run. 

3. Shortlist Your Options

You may use comparison tools, such as a personal loan calculator. Also, check the different comparison rates listed. See if there are certain fees bundled up into one percentage figure.

Once you’ve checked with multiple sources for the best interest rates and fees, shortlist your favourite loan options and features.

4. Start Your Personal Loan Application

You can now proceed with the application. You can apply over the phone or try internet banking.

For each application, you’ll indicate how much you want to borrow and submit information about your current income and employment. In several cases, you will also have to declare your monthly expenses, including your outstanding debt. 

Most lenders allow you to begin processing personal loan applications through online banking. They provide tools to help you decide what term would be best. 

The requirements are as follows:

  • Must be an adult Australian citizen or permanent resident 
  • Proof of an Australian home address
  • Proof of income – usually payslips or (Australian Taxation Office) ATO notice
  • Details of credit cards, debits, and other loans that you have

If you’re an (Australian business number) ABN holder, you need to show that you have had it for at least two years. Doing so proves that you’ve been in the business long enough and most likely financially stable. 

If you’re a new customer, you’ll need to provide significant proof of your identity to the bank. You may have to present your birth certificate, passport, driver’s licence, Medicare card, and utility bill or rate notice. 

After you submit your online application, you can expect a call from the bank within a couple of business days. The contract will now be posted or emailed to you. Sign and return the loan contract and send it back via email or post.

How Much Can You Borrow?

Below are the three steps you can take to determine how much should you borrow:

1. Create a budget 

Just because your lender approved a considerable loan amount, it doesn’t mean you should take out the entire sum.

Use a personal loan calculator to have a clear picture of your current financial situation. For example, you have a disposable income of $2,000. You will need to determine how much money you’re willing to part with to pay out your loan. 

2. Work out your repayments 

Depending on your present circumstance, you may opt for a smaller loan amount or consider a longer term. While a longer-term option may take the financial pressure off every month, you’d end up paying more money in interest during the life of the loan.   

3. Compare personal loans online 

Identifying how much you can afford to borrow lets you compare personal loans easily. Find one with the right features and offer competitive rates that suit your needs. 

Managing Loan Repayments 

Falling behind on a loan repayment can be stressful. Below are the steps to relieve financial pressure:

  • Know what you owe. 

Make a list of all your ongoing fees, loans, and debts, including how much each cost and the minimum monthly repayment. Include credit cards, unpaid bills, and penalties. 

Add them up to see the total amount of debt you have. This may be confronting, but it’s a reminder to take charge of your money. 

  • Work out the amount you can afford to pay 

Develop a budget plan. Make sure to list all your money that’s coming in (income or pension) and going out (debt and expenses) each month. Then tally them up.

If you’re spending more money than what’s coming in, it’s time to identify the things you need versus what you can do without. 

  • Prioritise your debts 

Identify your priority debts. If you can’t keep on top of them you can request financial hardship assistance

Many companies have hardship officers who can assess your financial situation and work out what option is best for you. Hardship options include temporarily altering your loan repayments or setting up a payment plan. 

You can also request financial hardship assistance for lower priority debts, such as internet and phone bills, payday loans, credit cards, or consumer leases. 

  • Build an emergency fund 

Use any surplus or extra funds you have each week to build a savings buffer. An emergency fund can give you a financial safety net to cover future changes in your income or unexpected expenses. 

Begin saving even if you can only put away a little amount. If you put $20 each week into your savings account, you’ll have over $1,040 by the end of the year. It’s a good start to give yourself financial breathing space. 

A good target is to have enough money to cover three months of expenses. It’s also beneficial if you set up a separate, high-interest savings account. 

You have the option to automate your savings or ask your payroll department if they can put a small portion of your wage into your emergency fund account. 

If you have a home loan with an offset account, you can maximise your offset account for your emergency fund. With this method, you can access your money quickly and lower your home loan interest payments at the same time. 

  • Seek financial advice 

Talk to a financial counsellor who will explain your options and help you create a plan. If you’re facing legal action, don’t ignore it. Search for community legal centres to help you, especially if you can’t afford a private solicitor. 

Personal Loans FAQs

1. What is the cheapest loan?

The best way to find out the cheapest loan is to make different comparison rates. You can use comparison tools such as a personal loan repayment calculator to get started.

2. Which is better, a credit card or a personal loan?

Personal loans and credit cards both have pros and cons. Taking out a personal loan is a good alternative if you need money upfront and plan to pay it off at an agreed time. 

The monthly repayment for a fixed interest rate is easy to budget. However, if you want to pay off your fixed-rate loan early, you may incur an exit fee. 

Interest-free credit cards can be a great option for small expenses. However, credit cards that initially offer 0% interest often revert to a much higher rate. If you can’t pay off the total balance before the interest-free period ends, you’ll end up paying more money than with a low-rate personal loan. 

3. Are there restrictions on purchases made with a personal loan?

Personal loans are designed to fund big purchases. Thus, it’s a suitable finance option for Australians who are doing some home renovation, planning a wedding, or buying a new car. 

Generally, lenders don’t have many restrictions on what purchases you’ll make with a personal loan. The important thing for them is that you can meet repayments over the loan period.  

4. Can I acquire a personal loan with bad credit? 

Your credit score affects your chances of being approved for a personal loan. The lender will not have the confidence in your ability to pay if you have a poor credit history, defaults, or late repayments. 

Suppose you’ve never had a credit card and haven’t established any credit history. In that case, you’d have difficulty getting approval, as the lender cannot readily determine whether you’re a responsible payer. 

Each time you try to apply for a loan, the lender will make a credit check to assess your eligibility, recorded on your credit report. 

You have free access to a copy of your credit report every three months. You can obtain it online within a day or two. If you prefer receiving it by mail, you have to wait up to 10 days. 

Since different agencies hold different information, you can obtain a credit report from more than one agency. 

When you get your credit report, check if all debts and loans listed are yours. Read all the details carefully, such as your name and date of birth.

Contact the credit reporting agency if you see any discrepancies. This is a free service. If there are loans in your report you don’t know about, it may mean someone has stolen your identity, so contact your bank right away. 

The calculation of your credit score will depend on what’s in your credit report. Your score relates to a five-point scale (excellent, very good, good, average, and below-average) and ranges between 0 1,200. 

A higher credit score means you can get a better deal and save money. If you have a low score, you may reduce your credit card limit to improve it. Paying your bills on time can also be helpful.  

5. Am I eligible for a personal loan if I’m a pensioner? 

To be approved for a personal loan as a pensioner can be challenging. It would be best to show the lender you can keep up with loan repayments despite not having a regular income. Therefore, you must have some substantial savings to show.

If you lack cash but own a property, you may apply for a reverse mortgage to increase your probability of getting your personal loan approved. 

A reverse mortgage allows Australians over the age of 60 to convert their property equity into cash. Just watch out for any interest charges. 

The government also provides assistance to pensioners who need extra funds. If you’ve reached the legal retirement age but are still earning an income, the pensioner loans scheme can give you access to capital tied up assets.  

On the other hand, if you’re a pensioner who needs extra cash, you can apply for an advance pension payment and repay it within six months. Those who hold a Government Centrelink Pension card are eligible to receive up to $1,200 under the NILS (No Interest Loan Scheme).

A personal loan is a good solution if you’re caught up in an emergency or just need extra money to cope with several financial situations. Many Australian banks offer great deals on personal loans with low interest charges and reasonable repayment terms.

Still have questions? Request a call from loan experts today! 

References

  1. Personal Loans https://moneysmart.gov.au/loans/personal-loans#:~:text=A%20personal%20loan%20lets%20you,thousands%20in%20interest%20and%20fees
  2. Debt Consolidation and Refinancing https://moneysmart.gov.au/managing-debt/debt-consolidation-and-refinancing 
  3. AFS Licensees https://asic.gov.au/for-finance-professionals/afs-licensees/
  4. Product Disclosure Statement https://moneysmart.gov.au/glossary/product-disclosure-statement-pds
  5. Study Assist https://www.studyassist.gov.au/
  6. Getting Married https://moneysmart.gov.au/getting-married
  7. Car Loans https://moneysmart.gov.au/loans/car-loans
  8. Register for an Australian Business Number (ABN) https://business.gov.au/registrations/register-for-an-australian-business-number-abn   
  9. Get Debt Under Control https://moneysmart.gov.au/managing-debt/get-debt-under-control 
  10.  Financial Hardship https://moneysmart.gov.au/managing-debt/financial-hardship
  11. Save for an Emergency Fund https://moneysmart.gov.au/saving/save-for-an-emergency-fund  

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Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.

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Disclaimers

Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.

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Disclaimers

Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.

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Disclaimers

Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.

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Disclaimers

Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.

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Disclaimers

Disclaimers

This is a model, not a prediction. Amounts and repayment periods are estimates only, actual amounts may be higher or lower.

  • It applies to loans where your regular repayment includes both interest and the gradual repayment of the amount borrowed.
  • Initial inputs will be displayed on the left hand side of the graph. Your ‘What if’ scenario (if applicable) will be
    displayed on the right hand side of the graph.