Unsecured personal loans: All your questions answered
If you're looking to borrow money but can't make up your mind whether an unsecured personal loan is the right pick for your situation, you've come to the right place.
The Mozo money team has put together this expert guide on everything you need to know about unsecured personal loans, from why your credit rating is important to the features to look out for.
What is an unsecured personal loan?
An unsecured loan is a personal loan that lets you borrow money without having to provide something you own as security, such as your house or car. As the risk is higher for the lender, an unsecured personal loan may have a a higher interest rate, shorter loan term and loan amount maximum than a secured loan. See how unsecured loans differ from secured personal loans.
What can I use an unsecured loan for?
Unsecured personal loans can be used for just about anything (within reason of course). So whether you want to renovate your kitchen, finance some extra study, facilitate your dream wedding or just jet set around the globe for a stint, an unsecured loan could help you make your dreams a reality sooner. Another popular use for unsecured personal loans is debt consolidation, where you consolidate multiple loan or credit card debts into a single personal loan.
Do I need security to take out an unsecured personal loan?
Unlike a secured loan, where you may receive lower interest rates and fees if you use your car or home as collateral for the loan, no security is required to take out an unsecured personal loan. This means you can still borrow money even if you don't have a car or property to use as an asset, plus your assets won't be in the direct firing line of the provider if you can't repay the loan. The catch is you may pay higher rates and fees. And keep in mind, you are not entirely scot free if you can't repay an unsecured loan, as the lender can still take you to court to recover their loss if you default on the loan.
Do I need a good credit rating to get an unsecured loan?
Most mainstream lenders will likely knock back your application for an unsecured personal loan if you have a bad credit rating. As you are not securing the loan with an asset, the only way a lender can determine how risky it will be to lend to you is through your credit rating.
Lenders often have tiered unsecured personal loan rates based on credit rating, so if you have an excellent credit rating you may be able to access lower interest rates than someone with an average or poor credit rating. Lenders will check your credit rating when reviewing your loan application, so its important that you check your credit report prior to applying and ensure that all the information is correct. Also be mindful that every personal loan you apply for will leave a mark on your credit report. Did you know you can get a free copy of your report each year? See here for details.
If you're smart about it and pay your repayments in full each month, an unsecured loan is a great way for you to build up a good credit history, which will mean when it comes time for you to borrow a larger amount for things like a home, it will be much easier for you to be approved for a home loan.
Is it hard to get an unsecured personal loan?
With no security to offer as a guarantee, getting approved for an unsecured personal loan can be more difficult than for a secured loan, as lenders generally have tougher lending criteria. To increase your chances of success, make sure you keep on top of any credit card and utility payments, reduce any credit card limits you don't use or need, be vigilant with your spending and diligently put aside money into your savings account. Anything you can do to show the lender that you're more than capable of repaying the loan will help.
How much can I borrow with an unsecured personal loan?
In Australia lenders will typically let you borrow anywhere from $2,000 to $70,000 with an unsecured personal loan, although some lenders cap the loan amount at $50,000 and a few will let you borrow $100,000 or more. For larger loan amounts, you may need to consider a secured personal loan. Unsecured loan terms are also often shorter (around 1 -7 years) than they are for secured loans, which can reach up to 15 years.
Are unsecured loans better than credit cards?
Whether to use an unsecured loan or a credit card really depends on your situation and your money management ability. Unsecured personal loans let you borrow an agreed amount and make regular, fixed repayments over a period of time to pay it off, so if you've taken out a 3 year loan you'll be debt free in 3 years. Credit cards on the other hand, don't come with a set repayment plan so if you're not careful you can end up in debt for decades.
Another plus for unsecured loans is that interest rates are usually lower than credit card rates, around 10-15%, compared to credit cards that sit around the 18% mark. And if you have an excellent credit rating, you may be able to access even more competitive unsecured loan rates.
Lastly, with an unsecured loan you'll have the option of choosing a variable or fixed interest rate (see below for a full definition) unlike credit cards that only come with variable rates. For a full comparison, read our personal loans vs credit cards guide here.
Should I choose a fixed or variable rate loan rate?
Pondering the age old question "to fix or not to fix"? Here's what you need to know about the two interest rate options to help you decide:
Fixed interest rate: With the rate locked in from the get go, a fixed rate loan helps you to more easily budget for your fortnightly or monthly repayments. There are a number of extremely competitive fixed rate personal loans on the market, with rates very much on a par with variable loans. But fixed rate personal loans can sometimes have less flexibility, such as not giving you the ability to make extra repayments, and some come with a break cost fee if you try to pay off your loan early.
Variable interest rate: A major drawcard of a variable rate loan is the ability to access more flexible options than you might be able to with a fixed rate loan, such as the ability to make extra repayments facility and access a redraw facility. Before choosing a variable loan however, make sure you can afford any potential rate rises. For instance, if you borrow $20,000 over 4 years and your 10% interest rate increases by 0.75 basis points, your monthly repayments will increase from $507 to $514. This might not seem like much but over 4 years that will cost you $336 extra in interest.
When it comes to choosing between a fixed or variable rate, you're never going to be able to predict what will happen in the market, so we suggest you choose the rate that works best for your circumstances.
What features should I look for in an unsecured loan?
Although interest rates and fees are the top two considerations for an unsecured personal loan, you should also look for features that could give you added flexibility and even help you say goodbye to your debt sooner. Here are a few to keep your eyes peeled for:
- Extra repayments facility: Pay off your unsecured loan faster, by ensuring you sign up with a loan with the option of 100% free extra repayments, which will allow you to make lump sum payments any time you like.
- Redraw facility: Another feature that can come in handy down the track is a redraw facility that allows you to dip into any extra payments you've made. But keep in mind this will mean you will pay more in interest and it will take longer to pay off the personal loan.
- Choice of repayments: Some lenders give you a choice of weekly, fortnightly or monthly repayments, allowing you to choose the schedule that best fits your pay cycle or lifestyle.
Are there any unsecured loan fees I should be aware of?
Many borrowers make the mistake of focusing too much on finding the cheapest interest rate and forgetting to check loan fees. There are a number of fees that can sting unsuspecting borrowers, here are the main ones to watch out for:
- Upfront fees: In Australia it's quite common for lenders to charge an unsecured personal loan application fee, and in some cases these can be quite hefty. Fees can range from $100 to $500 or more, but some lenders charge $0 application fee so it pays to shop around.
- Account fees: Monthly fees for unsecured personal loans are typically around $10 a month, but many loans charge no account fee at all. If you're not keen on paying ongoing fees, look for a loan that has none.
- Early repayment fee: Some unsecured loans charge a fee for repaying your loan earlier than the agreed fixed term. So if for instance you take out a 3 year unsecured personal loan but end up wanting to pay it off completely in year 2, you may be hit with a fee for doing this. These fees can be quite substantial, so if you think there's a chance you may be willing and able to pay off your loan early, it may be a good idea to choose one with no early repayment penalty.
An easy way to see how much an unsecured loan will cost is by looking at the comparison rate, which merges the interest rate with the fees to show you the 'true' cost of the loan.
Which lenders offer unsecured personal loans?
When you start your hunt for a competitive unsecured loan, don't automatically go for a bank personal loan, as there are plenty of other loans from online lenders, mutuals and peer to peer lenders with great rates and features, due to the fact they have lower overheads and don't need to pay dividends back to shareholders.
Mozo's personal loan comparisons let you enter how much you want to borrow to see what rates are available from different lenders and how much your monthly repayments will be.
And to really get the lowdown on a lender, head on over to our personal loan reviews section where thousands of customers just like you share their experience from the customer service to the product fees and features.
How quickly can I get an unsecured personal loan?
Applying online for an unsecured loan is a fairly quick and easy process. Most online application forms take less than 10 minutes to complete, and some lenders even offer a 1 minute rate estimate. Once you've submitted your application, the lender will process it and let you know whether it's approved or not. This can happen in as little as 24 hours, and in some cases you may even be able to get your funds on the same day.