Looking for Unsecured Personal Loans?
If you’re looking at getting a loan you may see the term unsecured personal loans floated around quite a bit. Sometimes with the amount of terminology that’s on loan sites you may just accept that it’s an odd term and give it a miss. However, here we break down what it means and you can decide whether an unsecured personal loan is the best option for you.
What is an unsecured personal loan?
An unsecured personal loan is a loan where you do not have to offer up one of your assets as security. This means if you don’t own a car, boat or caravan etc. that you can still get a loan, it will just come at a higher interest rate.
Unsecured personal loans are a riskier endeavour for the lender since if you can’t pay there is no asset to sell to recoup the money which means that there is no guarantee that they’ll ever get paid. Unsecured personal loans are usually smaller amounts for this reason since the lender may not want to undertake the risk if you are borrowing large amounts of money, particularly if you have bad credit.
An unsecured personal loan is perfect if you’re looking for a short-term loan with little commitment! Typically unsecured personal loans are small and hassle-free.
What is the difference between a secured and an unsecured loan?
After reading what unsecured personal loans are you may now be wondering “well what is the difference between unsecured personal loans and secured personal loans?”. The answer can be pretty simple but the following information will help answer your question.
A secured personal loan is a loan where the lender uses one of your assets as collateral. This means that if you default on your loan, the lender has the legal right to sell your asset to recoup the money. The most common types of secured personal loans are car loans and mortgages. The reason being is that the car or house is offered up as collateral.
Secured personal loans are also used if you’ve got a bad credit history and want to borrow a larger amount of money. The reason for this is that this helps reduce the risk for the lender. It’s also a good option for you, because if something happens and you can’t come to an agreement this will help you avoid a heap of legal fees.
It can be nerve-wracking putting up your assets for a secured personal loan. However, as long as you don’t borrow more than you can afford and you have a strict repayment plan in place as part of your budget, you don’t need to be worried.
In comparison unsecured personal loans don’t require you to put up one of your assets up as collateral. This is a good thing if you live in the city (therefore don’t have a car), you rent and you don’t own any significant assets. If this describes you then unsecured personal loans may be your best option.
Unsecured personal loans are usually for smaller amounts of money unless you can prove that you are a safe bet for the lender. This means showing a history of savings, and being in a financially stable position.
If you’re trying to decide between a secured loan and unsecured loan, we are not a financial advisor, so chat with someone who knows their stuff. You start by taking a look at the MoneySmart website.
What is the average interest on an unsecured personal loans?
For an unsecured interest loan, the average interest that you should be prepared to pay varies on a few factors. These include:
- Whether the interest rate is fixed or variable;
- How long your loan period is;
- How much you borrow
- What type of lender you borrow from?
- The current economic environment and therefore the interest rate set by the RBA; and
- The type of loan that you take out.
How much can you get for a personal loan?
How much you can get for a personal loan depends on what type of personal loan you apply for. Below is a breakdown of the most common personal loan amounts and their relevant titles
|Small Amount||Medium Amount||Large Amount|
|Usual Lender||Short Term Lender||Short Term Lender/Some Banks||Banks|
|Secured vs Unsecured||Usually Unsecured||Depends on the lender but most will be secured||Secured|
|Interest Rate/Fees||For large amount personal loans fees and interest rates depend on your lender and the conditions involved. The interest rate will also depend on whether you have a fixed or variable interest rate. All costs are subject to individual lenders, remember these costs are simply a guide.|
|Repayment Period||1 Year||2 Years||Up to 7 years|
|Notes||Even though small amount loans are unsecured they do have a high-interest rate. So explore your options to see which one is best for you before rushing into a small amount loan||For a large amount loan, the amount you can borrow will depend on your income and your various expenses. Consult a loan calculator like the one at the top of the page to see how much you can borrow.|
What is a vehicle secured loan?
A vehicle secured loan is one where you offer up your vehicle as security. This means your car; motorbike or even caravan will be used as security for your loan.
A vehicle secured loan is one of the most common types of secured personal loans due to such a large proportion of Australians renting. A vehicle secured loan will normally be necessary for a medium amount loan since the value of the vehicle has to correspond with the loan amount.
How does a secured loan work?
A secured loan works like most other loans. You go through the application, the lender checks your financial position etc. However, there is a difference with secured loans in terms of the valuation of your asset.
When offering up an asset as security you may think it’s worth one amount but according to the lender it’s worth another. Therefore, an important part of the secured loan process is getting an independent valuation. The value has to account for a variety of factors such as depreciation. Therefore, the asset may seem undervalued to you but they have to consider its value not just now but in the future and account for the worst possible situation, like you not taking care of your car.
Once the valuation is complete, the rest of the loan process can be completed as per normal.
What is collateral in finance?
You may have constantly seen the word collateral throughout this article and been left wondering what it means. Well, in short, it’s an item that you put up as security for you loan.
Collateral acts as security for the lender, since if you default they can sell it and recoup the profits in place of your loan repayments. Because of this, collateral normally needs to be the value or more than the value of the loan.
Before you Go
If you are worried about your lack of assets or only need a small amount of money; unsecured personal loans may be the best option for you. Instead of putting up assets as a form of collateral, the loan is purely based on your financial position. Find out if you qualify – apply now!