Unsecured personal loans must-knows
Are you looking to take out a personal loan but can't make up your mind whether an unsecured loan is the right pick for your situation? We are here to help with our full unsecured loan rundown, from why your credit rating is important to the features to look out for.
Here are our top 10 must-knows:
1. No security is required
Unlike a secured loan, where you will receive lower interest rates and fees if you use your car or home as security for the loan, with an unsecured loan no security is required. This means your assets won't be in the direct firing line of the provider if you can't repay the loan but the catch is you'll 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.
2. Unsecured loans can fund all sorts of things
Unsecured loans can be used for just about anything (within reason of course). So whether you're planning your upcoming nuptials and need some extra cash to pay everyone from the DJ to the florist or want to jetset around the globe for a stint, an unsecured loan could help you make your dreams a reality sooner.
3. Your credit rating is important
As you are not securing the loan with an asset, the only way a provider can determine how risky it will be to lend to you is through your credit rating. That's why it's so important to 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.
4. Lending criteria is often strict
With no security getting approved for a personal loan can be more difficult, as providers generally have tough lending criteria. So make sure (for at least 6 months) in the lead up to applying for a loan you keep on track with any credit card/utility payments 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.
5. Unsecured loans are designed for small borrowing amounts
Generally speaking, providers only offer unsecured loan amounts between $5,000 and $30,000, compared to secured loans that often reach up to $100,000. The unsecured loan terms are also often shorter (around 1 -7 years), compared to a secured loan that can reach up to 15 years.
6. Personal loan rates are usually lower than credit cards
If you're tossing up between a credit card and a personal loan, keep in mind that while an unsecured loan may have higher rates than a secured loan, unsecured rates are usually far lower, around 10-15%, compared to credit cards that sit around the 18% mark.
Plus unsecured loans give you the option of a 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.
7. You can choose between fixed and variable rates
Are you 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, with a fixed rate loan you can easily budget for your fortnightly or monthly repayments. But fixed rates and fees are generally higher than variable rate loans and have less flexible features, plus 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 more flexible options like an extra repayments facility and redraw facility and lower rates and fees than a fixed rate loan. Just make sure you can afford any potential rate rises. For instance, if you borrow $20,000 over 4 years, if 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 gives you the best peace of mind.
8. Unsecured loans offer flexible features
Just because you may pay a higher interest rate and fees with an unsecured loan that doesn't mean they don't come with some great features that will help you say goodbye to your personal loan 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.
9. There may be fees to budget for
Often the biggest concern when looking for an unsecured loan, is the interest rate but don't forget to factor in the different fees attached to taking out a loan including the application fee, ongoing fee and breakcost fee if you decide to pay out a fixed rate loan early.
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.
10. You can borrow from a range of providers
When you start your hunt for a competitive unsecured loan deal, don't automatically go for a major bank provider, as there are plenty of other deals from credit unions 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.