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What are unsecured personal loans?

Available for a variety of purposes, 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 may be 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, and 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 history 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 in the term agreed between you. It's also important to remember that borrowers with stronger credit scores will typically have access to lower interest rates than borrowers with bad credit.

Ten uses for unsecured personal loans

What are the pros and cons of unsecured personal loans?

It's important to weigh up both the benefits and disadvantages of an unsecured personal loan before deciding if it's the right fit for your financial situation. You can make a start by considering the following:

  • Unsecured personal loans don't require you to offer any collateral, such as a property or a car.
  • The application process for an unsecured personal loan is typically more simple as there's no need to provide details of an asset.
  • You'll generally be charged a higher interest rate on an unsecured loan than if you were able to offer collateral.
  • There tends to be fewer lending options out there for unsecured personal loans compared to secured personal loans.

What are the main features of unsecured personal loans?

When it comes to comparing personal loans, looking for a low rate might be a fair place to start. But, there are a number of other important features to factor into your comparison, including the following:

Features of unsecured personal loans at a glance

  • 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 repayments
  • Repayment terms – additional repayments; redraw facility

What's the difference between fixed interest rate and variable interest 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 periodically. 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 may resent their choice when rates move down.

Taking out a fixed rate loan can be more manageable, as the repayments stay consistent. In comparison, variable rate loan repayment amounts can fluctuate, requiring the borrower to ensure they have room in their budget for when this occurs.

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 the 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 isn't an accurate representation of the total cost of the loan, because it doesn't include fees. The comparison rate, on the other hand, includes both the advertised interest rate and the standard fees payable.

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, many 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:

  • Upfront application fee
  • Establishment fee
  • Monthly fee
  • Late payment fee
  • Extra repayment fee
  • Redraw fee
  • Early repayment fee

How much does an unsecured personal loan cost in Australia?

There are two main costs for an unsecured personal loan – fees and interest. Both the fees and interest charges, as discussed above, vary from loan to loan. In order to get an idea of how different interest rates affect loans, you might like to consider using RateCity's personal loan calculator. It can give you an estimate of your personal loan repayments and total interest charges payable over the life of the loan, based on your preferred loan amount, interest rate and loan term.

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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 borrower to borrower and lender to lender.

So just because a particular lender gives a friend of yours an unsecured personal loan of, say, $10,000, it doesn't mean that the same lender will automatically give you a $10,000 unsecured personal loan. You might only be approved for $5,000.

Plus, 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. It comes down to the specific eligibility criteria put in place by individual lenders and how you meet them.

Your credit score can also play a part in determining how much you may be able to borrow. Borrowers with excellent credit scores will generally be approved for larger loan amounts and lower rates than borrowers with sub-par credit scores. Consider checking your credit scores for free by visiting RateCity's credit score hub.

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.

Some of Australia's biggest lenders

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How do I apply for an unsecured personal loan?

Once you have a clear picture of your loan purpose and borrow amount, applying for a personal loan can be simple. Consider the following steps:

  1. Search and compare personal loans. If you're looking for unsecured loans specifically, you can use RateCity's comparison table to filter down your search results.
  2. Check your credit score to get an idea of whether you may be approved for the most competitive interest rates.
  3. Use a personal loan repayment calculator to see how different interest rates and loan terms will affect your repayments, and work out what best fits your budget.
  4. When you've selected the best loan for your needs, check the lending criteria for eligibility and apply online or at a branch.
  5. If you're approved, the total amount will be moved into your loan bank account ready for use.

And if you're looking for a little extra guidance, you can also reach out to a personal loan finance broker to help you with the personal loan application process.

How to strengthen your chances of getting your loan application approved

Most lenders require borrowers to meet the following basic eligibility criteria:

  • Be 18 years of age or over
  • Be an Australian citizen or permanent resident
  • Have proof of permanent, regular employment (most lenders will generally also specify a minimum income requirement)

In addition to this, it can also help to have an excellent credit score, a history of good credit behaviour and comprehensive documentation that meets all requirements. Submitting an accurate and complete loan application can help avoid delays with processing.

What credit score is needed for an unsecured personal loan?

Generally speaking, the better your credit rating, the more likely you'll be approved for an unsecured personal loan, and the more competitive interest rate you'll be offered. So it's worth putting in some work to boost your credit score if it has room for improvement.

The reason lenders favour borrowers with excellent credit scores is that their history of positive credit behaviour demonstrates that they are likely to be responsible borrowers going forward, posing less of a risk to the lender than those with lower credit scores.

So, while it's difficult to say exactly what credit score is needed for an unsecured personal loan, it's safe to say that higher credit scores typically strengthen your application. But keep in mind that your income and other personal circumstances will also contribute to your eligibility.

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What other types of unsecured financial products are there?

In addition to personal loans, there are other options when it comes to unsecured personal finance products. The most commonly used unsecured finance products are:

It's worth considering each of these products when deciding what's right for you. The best choice would be dependent on your requirements, including the borrowing purpose, borrow amount and how long you will need to pay it off.

Is a credit card better than an unsecured personal loan?

As a general rule, borrowing money through a credit card can be a more costly choice than taking out an unsecured personal loan, because credit card interest rates are almost always higher than personal loan rates. Plus, credit cards are a form of revolving debt, so 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, attempting this strategy could be risky unless you're certain you can achieve it. Otherwise, it could land you in a debt trap as it reverts to a likely even higher interest rate at the end of the interest-free period.

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.

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.

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.

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.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.