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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If you’re aiming to clear your debts in the short-to-medium term, it might be worth considering consolidating your debts into one personal loan.
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|
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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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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.
Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).
If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.
Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.
While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.
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
It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.
If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.
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
Many borrowers use quick loans to cover short-term or urgent costs, such as paying for car repairs, medical bills, or replacing broken appliances or electronics. Quick loans often have high interest rates compared with regular personal loans.
Before applying for a quick loan, consider your other available options, such as working out a payment plan or applying for an advance or extension.
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.
Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.
If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.
Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.
Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.