Unsecured personal loans
Have you decided to take out an unsecured personal loan? If so, the first thing to do is pause and ask yourself whether you really need it. That's not to say there can never be a good time to take out an unsecured personal loan – just that you need to make sure you really need one.
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 need an unsecured personal loan, your next step should be to conduct research and compare personal loans. An obvious place to start is the comparison search tool at the top of this page, which will allow you to compare many unsecured personal loans.
This tool will allow you to compare rates and fees 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 an unsecured personal loan is the most appropriate loan for your circumstances, or whether you wouldn't be better off with a secured personal loan. To make the process easier, we've provided answers for a few commonly asked questions about unsecured loans.
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What are unsecured personal 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 or a car.
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 an unsecured loan, the lender will be unable to automatically seize one of your assets
Don't assume, though, that defaulting on an unsecured personal loan doesn't have consequences or that your debt will magically disappears. The lender might pursue legal action and the court might then order the forced sale of one of your assets. You might also be forced into bankruptcy.
Why do people use unsecured personal loans?
Unsecured personal loans generally have higher interest rates than secured personal loans. So why, then, do people choose them? One reason is that 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.
Other borrowers, though, are able to provide adequate security for a personal loan, but are just unwilling. One reason might be that they don 't want to risk their assets; another might be that 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.
Ten uses for unsecured personal loans
There are many ways you can make unsecured personal loans work for your life, including the following:
|Consolidate your debts||Go on a dream holiday|
|Get married||Moving home|
|Furnishing a new home||Renovating your home|
|Paying school fees||Paying off medical or hospital bills|
|Fixing your car||Funeral expenses|
What are the main features of unsecured personal loans?
The main feature of an unsecured personal loan is the interest rate. These loans generally come with higher interest rates than secured personal loans, because they represent a greater risk to the lender. One reason lenders do this is to incentivise borrowers to provide security.
Some unsecured personal loans allow you to make extra repayments, which gives you the chance to pay off the loan sooner and reduce your total interest bill. A related feature of some unsecured personal loans is a 'redraw facility', which means you can make repayments ahead of schedule but then take back this extra money if you ever need it.
Unsecured personal 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 personal loans?
The big advantage with unsecured personal 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 and variable-rate personal 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 unsecured 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. Variable loans can be moved up or down – so people who fix tend to be pleased with their choice when interest rates move up but can regret their choice when rates move down.
What's the difference between the advertised rate and comparison rate?
It's easy to be confused when you see an unsecured 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 will 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?
The comparison rate for a personal loan is calculated based on a loan of $30,000 over five years. The reason why the calculation includes a loan amount and loan term is because lenders need a 'standard' personal loan for the sake of comparison. (The loan amount and loan term can influence the interest paid and fees charged.)
Of course, most unsecured personal loans differ from this standard. As a result, comparison rates aren't always entirely accurate. But they're still important, because they often provide a more accurate gauge of a loan's total cost than the advertised rate. (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 if you take out an unsecured personal loan:
- Establishment fee
- Monthly account-keeping fee
- Late payment fee
- Repayment redraw fee
- Early repayment fee
How much does an unsecured personal loan cost?
There are two main costs for an unsecured personal loan – fees and interest. The fees, as discussed above, vary from loan to loan. The same can be said for interest – although to give you an idea of how different interest rates affect loans, the table below shows how much you 'd have to repay if you borrowed $25,000 over five years:
|Interest rate||Monthly repayments||Total interest||Total repayments|
Features of unsecured personal loans
- Advertised rate – e.g. 8.50 per cent
- Comparison rate – e.g. 9.75 per cent
- Fees – establishment; monthly; redraw; late payment; early repayment
- Loan size – e.g. $30,000
- Loan term – e.g. 5 years
- Loan type – variable or fixed
- Loan purpose – debt consolidation; wedding; renovations; holiday; medical
- Repayment frequency – weekly, fortnightly or monthly
- Repayment options – extra repayments; redraw facility
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 there is no one standard figure. Instead, 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 $10,000 unsecured personal loan. You might be able to get only $5,000.
Also, if Lender X is willing to give you an unsecured personal loan of, say, $8,000, it doesn't mean Lender Y will also lend you $8,000 – Lender Y might only give you $6,000, or might not be willing to give you any money at all.
Who offers unsecured personal loans?
Unsecured 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.
But the market for unsecured personal loans doesn't end there. It also includes non-bank lenders like Pepper Money, Liberty, Now Finance and Latitude Financial Services. Unsecured personal loans are also offered by peer-to-peer lenders like SocietyOne, RateSetter, Harmoney and Moneyplace.
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. Also, credit card providers don 't force you to follow repayment plans – unlike personal loan lenders.
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 then you wouldn't pay 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.
Kate was one of RateCity's Personal Finance Commentators. She has been a journalist for more than a decade, most of which has been spent writing about money. Most recently, she was the Australian Financial Review's personal finance correspondent. She is passionate about personal finance and women's independence.
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Frequently asked questions
Can you refinance a $5000 personal loan?
Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.
If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.
What is an unsecured bad credit personal loan?
A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.
Should I get a fixed or variable personal loan?
Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.
A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.
What is the average interest rate on personal loans for single parents?
Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.
What is a bad credit personal loan?
A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.
How much can you borrow with a bad credit personal loan?
Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.
Do student personal loans require security?
While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.
Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.
What is a personal loan?
A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.
Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.
What are the pros and cons of personal loans?
The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.
One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.
What do single parents need for a personal loan application?
Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:
- Proof of identity
- Proof of residence
- Proof of income
- Details of assets (e.g. car, home)
- Details of liabilities (e.g. credit cards, other loans)
- Loan amount
- Loan term
Can I repay a $3000 personal loan early?
If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.
Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.
Can I get a no credit check personal loan?
Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.
How long does it take to get a student personal loan?
Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.
What are the pros and cons of bad credit personal loans?
In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.
However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.
Is it hard to improve your credit score?
It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.
As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.
Can I apply for a quick loan online?
While some lenders will require you to provide paperwork in person, many lenders will allow you to make an application for quick personal loan online. You’ll still need to provide information on your identity, income, and loan purpose in most cases.
Can I get a fast loan if I’m unemployed or on Centrelink?
Even if a lender has no credit checks, they will usually still need to confirm you can afford to repay a fast loan on your income before they’ll approve your application.
If 50% or more of your income comes from Centrelink payments, you may find it more difficult to have a fast loan application approved. Consider checking with the lender before applying to confirm if they lend to people on Centrelink.
Can I get a $4000 personal loan if I’m unemployed or on Centrelink?
Before most providers of personal loans or medium amount loans will approve an application, they’ll want to know you can afford the loan’s repayments on your current income without ending up in financial stress. Several lenders don’t count Centrelink benefits when assessing a borrower’s income for this purpose, so these borrowers may find it more difficult to be approved for a loan.
If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.
Are there $2000 emergency loans?
If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.
For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.
For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007
What do credit scores have to do with personal loan interest rates?
There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.
If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.
If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.