Unlike a secured personal loan, an unsecured personal loan is a way to borrow money without providing an asset — like a home or car — as collateral.
Due to the lack of collateral, unsecured loans can be harder to qualify for. Lenders typically prefer candidates with good credit histories, solid income levels and a reliable employment status to ensure the loan can be repaid.
How does an unsecured personal loan work?
Unsecured personal loans allow you to borrow a set amount of money for a predetermined period of time. Like many loans in Australia, unsecured personal loans are paid back with interest.
The big difference between secured and unsecured loans is that you won’t be required to provide an asset as collateral. This may mean the amount you can borrow is lower than other types of loans. Plus, the interest rates on unsecured loans are typically higher than secured options, due to the lender taking on more risk.
Unsecured loans may also have shorter repayment terms given that the bank has less surety that it will recoup the debt.
Common uses of an unsecured loan
Unsecured loans can be used to cover a variety of products or services, but are typically designed to pay for things like holidays, weddings, funerals, or large birthday parties, for example. Some lenders may have specific restrictions on what you can use the money for.
An unsecured personal loan can also be used for debt consolidation, especially if you have multiple credit card balances that are accumulating high interest, and you’re trying to pay them off simultaneously.
How to get an unsecured personal loan
Unsecured personal loans are issued by a range of financial institutions, such as banks and credit unions. Applications can be made online or in person, depending on the issuer.
Lenders typically look at the following details when you apply for a loan, so it’s a good idea to have supporting documents ready when you apply.
- Employment status.
- Residency status.
- Credit report history.
- Financial details, such as existing debts.
Nerdy tip: Some lenders may require a guarantor for an unsecured loan. A guarantor is personally responsible for repayments if you default.
How to compare unsecured personal loans
Interest rates for unsecured loans are based on your personal details and risk profile. They can vary widely among lenders, so it’s vital to shop around before you apply.
You’ll also want to know whether the loan will charge fixed-rates or variable-rates. Most unsecured loans tend to be variable, which means the interest rate fluctuates with the market. It’s harder to know how much you’ll pay in total for a variable loan as it’s impossible to predict how the market will perform.
Fees and charges
All loans come with fees and charges so the trick is to minimise these, or negotiate them with your lender from the outset. These can include application and establishment fees, ongoing monthly account fees or early repayment fees.
Unsecured loan amounts rarely go above $100,000. The amount you can borrow differs among providers. Even if you qualify for a high loan amount, it’s always a good idea to borrow only what you are comfortable paying back.
Should I get an unsecured loan?
If you need to borrow a relatively small amount, say just a few thousand dollars, and you’re confident you can pay it off in a timely fashion, it may be worth using a credit card instead of an unsecured personal loan. You can take advantage of any interest-free promotional periods and skip the lengthy loan applications.
However, if you need a larger sum of money to be paid back over several years — and have a relatively strong credit history and provable cash flow — an unsecured loan might be the better option.
Taking out any personal loan shouldn’t be taken lightly. Lenders usually have financial hardship provisions in case you default on a loan, but you still need to be wary when borrowing large amounts of cash. In some circumstances it may be better to borrow from a trusted friend if at all possible, or even delay the purchase until you can afford it.
Advantages of unsecured personal loans
- No asset required as collateral.
- Relatively quick application process compared to secured options.
- Flexibility in how the money is spent.
Disadvantages of unsecured personal loans
- Higher interest rates than secured loans.
- Relatively short term lengths and loan amounts.
- Restrictive eligibility requirements.
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