Have you decided to take out a personal loan? If so, the first thing to do is pause and ask yourself whether you really need the loan.
Borrowing money can be expensive. It can also have serious long-term consequences if you’re unable to repay the money. In that case, your credit rating will be damaged, which will make it harder for you to qualify for future loans. You might even be taken to court by the aggrieved lender.
If you’ve decided that you do, indeed, need a personal loan, your next step should be to conduct research. An obvious place to start is the comparison search tool at the top of this page. This tool will allow you to compare rates and features from a range of lenders, so you can get an idea of how much you’d have to repay per month and how you’d be able to manage the loan.
As you do your research, one of the things you’ll have to consider is whether your personal loan should be secured or unsecured. To make the process easier, we’ve provided answers for a few commonly asked questions about unsecured loans.
What are unsecured loans?
Unsecured loans are personal loans where you don’t have to provide the lender with any security, or collateral. That makes them different to secured loans, which are personal loans where you do need to provide security, such as property.
If you default on a secured loan, the lender can seize your collateral, sell it and then use the sale proceeds to repay the loan. If you default on a secured loan, the lender will be unable to automatically seize one of your assets – but that doesn’t mean your debt will magically disappear. The lender might pursue legal action and the court might then order the forced sale of one of your assets.
Why do people use unsecured loans?
There are two reasons why borrowers choose unsecured personal loans (which have higher interest rates) over secured personal loans (which have lower interest rates):
- They’re unable to provide adequate security – perhaps because they don’t own any valuable assets or because those assets have been used to support other loans
- They’re unwilling to provide adequate security – perhaps because they don’t want to risk their assets or because they want to use those assets to support other loans
Before pursuing an unsecured personal loan, it could be worth doing an online credit check to make sure your credit score would qualify you for a loan. Lenders are usually willing to consider unsecured loans, but are likely to ask for evidence that you will be able to repay the money loaned to the term agreed between you.
What are the main features of unsecured loans?
The major difference between an unsecured and a secured loan is the interest rate you are likely to be charged, which is higher than if you have an asset with which to secure the loan. Unsecured loans can be useful if you want several thousand dollars for, say, a car, whitegoods or a holiday. As with any loan you need to be conscious of your ability to pay it back and so need to factor in whether you will go for a fixed or variable interest rate.
What are the pros and cons of unsecured loans?
The big advantage with unsecured loans is that you don’t need to offer any collateral, such as a property or a car. The big disadvantage is that you’ll be charged a higher interest rate than if you were able to offer collateral. Another disadvantage is that there are fewer lending options out there.
What’s the difference between fixed-rate loans and variable-rate loans?
A fixed-rate loan can’t be changed during the period for which it’s ‘fixed’ or locked in. For example, if you take out a three-year fixed-rate personal loan priced at 9.75 per cent, you’re guaranteed to be charged 9.75 per cent during that three-year period. However, if you take out a variable-rate loan priced at 9.75 per cent, the lender can change the interest rate whenever it likes – even the day after you get the loan. Variable loans can be moved up or down. People who fix tend to be pleased with their choice when interest rates move up but can regret not signing up for a variable loan when interest rates move down.
What’s the difference between the advertised rate and the comparison rate?
It’s easy to be confused when you see a personal loan with two different interest rates – the advertised rate and the comparison rate. The main difference between the two is that comparison rate is usually higher than the advertised rate. (It can be the same, but it can never be lower.) The advertised rate is how much interest you’ll be charged – but this figure can give a misleading impression of how much you’ll have to pay, because it doesn’t include fees. As a result, the comparison rate is regarded as the ‘real’ interest rate, because it includes both the advertised interest rate and the fees.
How is the comparison rate calculated?
With personal loans, the comparison rate is based on a loan of $10,000 over three years. Comparison rates are also used for home loans and car loans – although based on a different formula.
What fees are charged for unsecured personal loans?
Fees differ from lender to lender, so you might be charged none, some or all of these fees:
- Establishment fee
- Monthly account-keeping fee
- Late payment fee
- Repayment redraw fee
- Early repayment fee
Who offers unsecured personal loans?
Personal loans are offered by several dozen different lenders. That includes the big four banks – ANZ, Commonwealth Bank, NAB and Westpac. It also includes leading non-major banks like Citibank, HSBC, Bankwest, St George, Bank of Queensland, Suncorp, MyState, Bank of Melbourne, BankSA, Heritage Bank, Greater Bank, Hume Bank and IMB Bank. It also includes non-bank lenders like Pepper Money, Liberty and Latitude Financial Services. Personal loans are also offered by peer-to-peer lenders like SocietyOne, RateSetter, Harmoney and Moneyplace.
How much can I borrow with an unsecured personal loan?
Unfortunately, asking how much you can borrow with an unsecured personal loan is like asking how long a piece of string is. That’s because borrowing capacity differs from person to person and lender to lender.
So just because a particular lender gives a friend of yours an unsecured personal loan of, say, $5,000, it doesn’t mean that the same lender will automatically give you a $5,000 unsecured personal loan. Also, if Lender X is willing to give you an unsecured personal loan of, say, $3,000, it doesn’t mean Lender Y will also lend you $3,000 – Lender Y might only give you $2,000, or might not be willing to give you any money at all.
Is a credit card better than an unsecured personal loan?
As a general rule, borrowing money through a credit card is worse than taking out an unsecured personal loan, because the credit card will almost certainly charge higher interest. The one exception to the rule is if you borrow money through a credit card and then pay off the entire debt during the interest-free period – because, in that scenario, you won’t be charged a cent of interest. However, you shouldn’t attempt this strategy unless you’re certain you can pull it off, otherwise it could land you in a debt trap.