Unsecured personal loans – a 101

An unsecured personal loan allows you to borrow money without using an asset as security. You have more flexibility with the money as a result and you can use it to cover any reasonable costs or purchases.

The benefits of unsecured personal loans:

More flexibility

Secured loans can have more restrictions on the use of the funds. Most car loans are secured and the money can only be used to buy the car that the lender has agreed to. Unsecured loans can be used for anything that’s reasonable and worthwhile, whether this a single purchase or several; you can also use it to consolidate other debts.

Lots of products to choose from

Unsecured loans are very popular so most banks and lenders offer them. It can be a bit bewildering at first, with so many loans on offer, so a visit to a comparison site is a good idea. You can filter your best options by selecting term lengths and whether you want fixed or variable rate interest, as well as looking for any other features you might want.

About the interest rates

As you’re not offering any security, the lender deems the loan to be a little riskier than a secured loan and this is reflected in the slightly higher interest rates applied to unsecured loans. You can still find low rates, especially among peer–to–peer or online–only lenders, however, and the extra flexibility of an unsecured loan may be worth the extra cost.

Why is the comparison rate important?

The comparison rate shows you the real cost of the loan as it includes all the ascertainable fees and charges that come as part of the agreement. It’s displayed as a percentage and it’s usually a shade higher than the headline interest rate.

How do unsecured loans actually work?

Unsecured loans usually offer between $1,000 and $70,000 without asking for an asset like a car or a property. You agree to repay the loan, plus interest, over an agreed term, usually between one and seven years.

You can use the money for pretty much any personal purpose, but the lender may ask why you’re applying to borrow money. Your reason could help the lender to make a decision.

As well as the higher interest rate, there may also be establishment and management fees, so you need to factor these into your calculations. Unsecured loans also tend to allow overpayments and early repayment without penalties.

Looking for the best unsecured personal loans -here’s what to look at.

The interest rate

Is it fixed or variable? How high is it? For example, the Harmoney unsecured personal loan’s interest rates vary from 6.99 per cent to 26.65 per cent (depending on your risk profile) on amounts from $2,000 to $35,000.

The minimum and maximum loan amounts

Lenders have a minimum and a maximum amount so you need to make sure the provider you’re looking at suits your needs. The ANZ fixed rate personal loan offers from $5,000 to $50,000, whereas the Latitude personal loans can range from $3,000 to no maximum loan amount as it is assessed on case by case basis..

Fees and charges

Many loans have upfront and ongoing fees, so look these over before agreeing to anything. The comparison rate is a good indicator of how high the fees are. The Now Finance unsecured loan has an application fee of $495 and a monthly service fee of $13, while Society One’s unsecured loan has no application or monthly fees at all.

Extra features

Some loans have additional features, such as the ability to make overpayments without penalties, or discounts on other products the lender offers.

Unsecured loans – the good and bad

The fact you don’t put up and asset means you’re not risking anything you own. It’s also good news if you don’t own anything of significant value.

Once you’re approved for the loan, the funds are transferred to you and you can use them as you wish.

Unsecured loans tend to have easier application processes as there’s no valuation of assets. You could get a response in minutes and the funds within hours (depending on the lender).

Unsecured loans can have higher interest rates and fees, due to the higher risk involved to the lender.

If you miss a payment, the lender can apply high late fees and, eventually, take you to court if you go into default.

How to get the best out of your unsecured loan

Be upfront about your reasons for applying

You’ll probably have to tell the lender why you need the money when you apply for an unsecured loan. Always be honest, because it’ll help the lender make the right decision. Whether it’s to consolidate debts or to renovate your kitchen, honesty is always best.

Don’t borrow more than you need

It’s tempting to borrow more that you need, but you have to pay it all back and taking out a larger loan means you’ll be paying more and for longer. Use a loan calculator to work out what’s comfortable for you.

Even if you’re offered more than you expected by the lender, you should think carefully before signing on the dotted line as it won’t be the lender’s fault if you can’t service the debt.

Always use a licensed lender

Your lender must be licensed by ASIC and you can look through the ASIC Professional Register to make sure the provider is on it.

Always compare products

You might be taken in by a persuasive headline rate only to find that the fees bump up your monthly repayments into uncomfortable territory. Always check the comparison rate and compare loans to one another.

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