When you need a quick cash injection, sometimes an unsecured personal loan can come to the rescue. But before choosing the personal loan that’s right for you, it’s important to understand what an unsecured personal loan is, how it works, and what your options are.
What is an unsecured personal loan?
An unsecured personal loan is a personal loan that does not require you to provide any property as collateral. This is different from the other type of personal loan offered – a secured personal loan – which would require collateral.
You can use an unsecured personal loan for a vacation, an expensive makeover, or just about anything. They have the advantage of being more flexible than most other types of loans, which are very strict in terms of expenses.
Secured vs Unsecured Personal Loans
There are two types of personal loans in Australia: secured and unsecured. Let us briefly review the differences between these two personal loans for a better understanding of the two.
As mentioned, secured loans require an asset as collateral, unlike unsecured loans. This is the biggest difference between the two types of loans, and a few things can be noted accordingly.
Unsecured personal loans are generally small amounts and have shorter repayment terms. Without an asset attached to the loan, lenders are generally reluctant to lend large amounts. With a secured personal loan, if you fail to repay the loan, the lender can seize your property and sell it to make up for their losses.
But that doesn’t mean you can freely default on an unsecured personal loan without consequence – your credit score would still suffer, the lender could take legal action against you, and you could find yourself in worse financial trouble. Like any other financial product, unsecured personal loans can be attractive if managed responsibly.
Unsecured personal loans are considered more “risky” for the lender. You can see this reflected in a higher interest rate compared to secured personal loans.
Advantages and disadvantages of unsecured personal loans
To better understand how unsecured personal loans work and what you can expect, let’s discuss some notable pros and cons.
Benefits of Unsecured Personal Loans
No security needed: As we mentioned, you don’t need to offer any asset to take out an unsecured personal loan.
The application process can be faster: With secured loans, the lender will need to take steps to check your asset for security, which means you will need to provide supporting documentation. For example, if you are offering your car, you may need registration documents, insurance documents or even an appraisal. But with an unsecured personal loan this is not necessary, you may find that the application and approval process is faster.
Shorter loan repayment terms: While this might be considered a downside, let’s discuss the positive aspects of it. First, you’ll be out of debt faster, which is always a bonus. Second, paying off a loan faster could result in an overall reduction in interest charges, which could save you money.
Disadvantages of unsecured personal loans
Higher interest rate: Since the lender does not have the same security as with a secured loan, you will likely have to pay a higher interest rate.
Fewer lenders: You may also find that due to the increased “risk” of unsecured personal loans, there are fewer lenders and therefore fewer options to choose from. It could mean getting a less competitive deal because there are fewer lenders competing for your business.
Borrow less: Again, due to the “risk” of unsecured personal loans, you will likely be more limited in the amount you can borrow. Lenders who offer high amount unsecured personal loans can be dodgy, so you should do your research before applying. If you need to borrow a large sum of money, a secured personal loan may be your only viable option.
How to Compare Unsecured Personal Loans
There are a few notable features of unsecured personal loans that you should compare to make sure you’re getting a good deal. You can do this by using a comparison site like Savings.com.au.
You should look at the advertised interest rate, as well as whether this rate is variable or fixed. A fixed rate means that said interest rate will remain the same for the duration of your loan, while a variable rate can go up or down depending on the cash rate/market activity. Shop around to find the most competitive interest rate available.
Do not ignore the advertised comparison rate. This encompasses not only the interest rate, but also other fees and charges – such as monthly fees or other costs – associated with the loan. The comparison rate will give you an idea of how much you will pay per year in total fees and charges on the loan.
With this comparison rate in mind, look at exactly what fees and charges apply to the loan. If a loan has a “low” interest rate, but a pile of other fees and charges like upfront application fees, set-up fees, etc., it might not be such a good deal. .
Amount of the loan
Pay attention to the size of the loan you want. If you need $10,000 for home renovations, make sure that’s what you’re asking for.
term of the loan
You should also consider the term of the loan, which is how long you have to repay the borrowed money. Is it six months? One year? Make sure that the loan type and repayment amounts will be manageable for you over the life of the loan.
Along the same lines, know what your repayment terms will be. Will you be required to pay weekly, fortnightly or monthly? How does this align with your payroll cycle or any other financial commitments you may have? You should also find out if there are any breakage fees/penalties involved with additional repayments or prepaying your loan.