If you’re seeking a loan in Australia for purposes other than purchasing a home or vehicle, it’s likely that you’re considering an unsecured personal loan.
This type of loan encompasses a wide range of options, making it challenging to refine your choices. However, despite the eye-catching promotions from lenders, an unsecured personal loan is fundamentally a simple product.
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In this guide, we’ll highlight the essential factors to consider when comparing unsecured personal loans, helping you make an informed decision.
What is an Unsecured Personal Loan?
An unsecured personal loan is a type of fixed-term loan that doesn’t require any collateral. Unlike secured loans, where a specific asset (such as a vehicle) is used as security, an unsecured personal loan allows you to borrow funds without pledging any property.
This flexibility means you can use an unsecured personal loan for a wide variety of purposes. Typical Uses for Unsecured Personal Loans Include:
- Debt Consolidation (57%)
- Home Renovations (14%)
- Medical and Dental Expenses (6%)
- Travel Costs (5%)
Why Are Unsecured Loans More Expensive Than Secured Loans?
The cost of most loans is influenced by the level of risk involved. Lenders typically charge more when there is a higher risk of not getting their money back.
Unsecured personal loans present a greater risk for lenders because there is no collateral (security) that they can claim if you fail to repay the loan. This increased risk leads to higher interest rates compared to secured loans, where an asset can be repossessed if needed.
However, it is still possible to find low interest rates on unsecured personal loans. Securing a lower rate can reduce your regular repayments and decrease the total amount you will pay over the life of the loan.
Comparing Unsecured Personal Loans in Australia
To find the best unsecured personal loan for your needs, consider comparing these four key factors:
1. Interest Rate
Seek out the lowest interest rate for which you qualify. Lenders set your rate based on risk, with your credit score playing a significant role. The average interest rate for unsecured personal loans in Australia is 13.87% per annum. However, those with top credit scores (853-1,200) typically see an average rate of 9.79% per annum.
2. Fees
Unsecured personal loans may include various fees, such as application fees, annual or monthly fees, and charges for making extra repayments or repaying the loan early. For instance, the average monthly fee is around $5, which can accumulate to $300 over a five-year term. Many unsecured personal loans are available with no fees at all.
3. Comparison Rate
The comparison rate combines the interest rate with most associated loan fees, providing a more accurate picture of the total annual cost of the loan. It helps in assessing the overall expense of the unsecured loan more effectively.
4. Loan Term
The loan term refers to the length of time over which you are required to repay the loan. A shorter term generally means higher monthly repayments but less overall cost. Our analysis shows that most borrowers opt for a five-year term.
What Is the Maximum Amount You Can Borrow with an Unsecured Personal Loan?
With an unsecured personal loan, you can borrow amounts ranging from $1,000 to $50,000.
Data indicates that the average amount requested for an unsecured personal loan is $22,643.
However, the exact amount you can borrow depends on your individual situation. Lenders will assess factors such as your credit score, income, and expenses to determine the loan amount you are eligible for.
How to Qualify and Apply for an Unsecured Personal Loan
So, who is eligible for an unsecured loan? The basic requirements are:
- You need to be at least 18 years old.
- You must be an Australian citizen or a permanent resident.
- You should be employed or have a stable source of income.
- You must be able to manage the loan repayments alongside your other expenses.
To apply for an unsecured personal loan, you will need to:
- Submit a loan application to a lender.
- Provide supporting documentation, such as payslips, bank statements, and proof of other debts and assets.
- Sign a loan contract and agree to the terms and conditions.
If you lack standard documentation like payslips, a low doc personal loan may be a more appropriate option.
Is an Unsecured Personal Loan a Good Idea?
When considering an unsecured personal loan, it’s important to weigh the advantages and disadvantages. The crucial factor is whether you can comfortably manage the repayments both now and in the future.
Here’s an overview of the advantages and disadvantages to assist you in making a well-informed choice:
Pros
- Versatile Use: Unsecured personal loans can be used for a wide range of purposes.
- No Collateral Required: You don’t need to provide an asset as security.
- Simple Application Process: The process to apply for an unsecured loan is generally straightforward.
- Flexible Repayments: You can usually choose from various repayment schedules such as weekly, fortnightly, or monthly.
- Early Repayment Option: Many loans allow for early repayment without penalty, giving you the option to pay off the loan sooner if you can afford it.
Cons
- Higher Interest Rates: Unsecured loans typically have higher interest rates compared to secured loans.
- Lower Loan Amounts: The amount you can borrow may be lower than with secured loans.
- Shorter Loan Terms: The term of an unsecured loan might be shorter compared to secured loans.
- Higher Rates for Poor Credit: If you have bad credit, the interest rates on unsecured loans can be quite high.
- Possible Early Repayment Fees: Some lenders may charge a fee if you repay the loan early.
Consider these factors carefully to determine if an unsecured personal loan aligns with your financial needs and situation.
