Why would someone take out an unsecured personal loan?
If you are looking to buy a house, car or other significant asset, it might make more sense to look for a secured loan and receive a lower interest rate. However there are some circumstances where an unsecured personal loan might be the better choice.
A personal loan can be used to purchase just about anything, although many lenders will want to ensure that you have a responsible and legal reason.
Some common reasons you might seek an unsecured personal loan include:
One off purchases
Many people take personal loans to pay for large, one off expenses on things that aren’t assets. Weddings and holidays are examples.
Consolidate credit card debt.
If you have outstanding credit card balances across a variety of products, an unsecured loan might allow you to consolidate your debts into a single, monthly payment. You can take out a loan to pay off your debts straight away, then just pay off the loan instead of your individual creditors.
Buying an older car
Many lenders restrict secured personal loans to cars no older than 7-12 years. If you want to buy an older car, such as a classic, you might have no choice but to find an unsecured loan.
Which institutions offer unsecured personal loans?
An unsecured personal loan is a standard financial product you will be able to find at big and small banks. There are also many non bank lenders and peer to peer services that offer loans of this type.
InfoChoice compares a wide variety of unsecured personal loan providers such as the major banks in NAB, ANZ, CommBank and Westpac. We also compare other popular providers such as Wisr, MoneyPlace, Plenti, Now Finance, OMM and more.
What are the benefits of an unsecured personal loan?
Flexibility
With a secured loan, the funds are generally allocated to a specific purchase, and therefore have restrictions in how the money can be used. A car loan, for example, can only be used to purchase a car. Many lenders now also dictate what type of car you can buy and its age.
With an unsecured personal loan though, you have complete flexibility with how you spend the money. You could choose to spread the money across multiple expenses: you could consolidate your credit card debt and invest in some new furniture with the same loan, for example.
The range of options
As the most basic form of loan, unsecured personal loans tend to have the widest variety of products available. Some will have extremely competitive interest rates, some may offer the money in your account within 60 minutes of applying, others may have the ability to make early repayments without penalty. With all these options, you should be able to find a loan that’s well suited to your specific needs.
Less risk to your property or assets
As you have not put anything up for security, the lender can’t repossess anything if you default on the loan. However, you continue to be liable to a loan you can’t pay, and the lender may begin court proceedings to claim what they are owed. If you default on your loan or fall into arrears, your credit history will also take a beating.
Better interest rates than many credit cards
While unsecured loans generally have higher rates than secured loans, they often are less than credit cards. For example, competitive unsecured personal loan rates are typically around 10-15% p.a. while credit card rates are commonly over 20% p.a.
What are the disadvantages of an unsecured personal loan?
Increased interest rates
As discussed, lenders typically offer better rates when the borrower puts something up as a security, as this mitigates their risk.
Risk of defaulting
If you become unable to make repayments on your loan, whilst there is no security the lender can claim, the debt will not go away. They can pursue legal action, and potentially have you declared insolvent or bankrupt. Even if you are able to negotiate a payment plan, defaulting on a loan can affect your credit score, and your ability to get loans in the future.
Increased liabilities
If you are applying for a home loan or car loan, you will need to declare all of your current liabilities. An outstanding loan may negatively affect your chances of being approved.
What should you look for in an unsecured personal loan?
When comparing these products, there are several elements you should be considering:
Interest rates.
The most important factor in any loan is how much interest you will pay on it. Interest rates will vary significantly between providers, and will depend on whether your loan is fixed or variable.
How much you can borrow
Lenders will usually establish both a minimum and maximum amount they are willing to give out. Typically, a loan of this type won’t be less than $1,000, or more than $100,000, but different providers will offer different amounts.
The additional features on offer
Although these loans are fairly simple, some will still have extra features that are worth considering. Some loans will allow you to redraw, manage your account online, or make early repayments.
Fees and additional charges
Most loans will include additional fees and charges on top of the interest rate. These may include application or establishment fees, monthly account fees or early repayment fees.
