Unsecured Personal Loans

A lot of loans are ‘secured’, which means you provide an asset of some description as security for the loan. A loan for a car will often be secured by the car itself. If you default on your payments, then the asset can be repossessed by the lender and sold to recover some of their losses.

Other times, there may not be an asset required with which to secure the loan. These types of personal loans are referred to as ‘unsecured’.

Like any personal loan, an unsecured personal loan is generally granted when you borrow a relatively small amount of money from a lender.

You’ll normally have to pay it back within a set period, up to 7 years.

Whereas interest rates for personal loans can be as low as between 4 and 8 percent, you might find that an unsecured loan attracts a slightly higher interest rate. This is because an unsecured personal loan is not secured by any asset, so generally the risk to the lender is greater.

Some lenders may ask you to provide a guarantor for your unsecured loan, especially if this is your first.

Personal loans vary, and can be anywhere from $2,001 to around $100,000.

The amount you can borrow is affected by several factors, such as:

• your income and employment status;
• your outgoings;
• your credit rating;
• Any other outstanding debts
• whether you own or rent your home
• whether you have any dependents.

As mentioned earlier, you may require money in a hurry for a number of reasons. Some lenders may require details of what the funds are to be used for, and in some cases may set mandatory conditions for the use of the loan funds. For example, if you’re using the funds from your unsecured loan to finance home renovations, the lender may stipulate in the agreement that the funds can only be used for that purpose and nothing else. That said, here are some of the expenses you may be able to finance with an unsecured personal loan:

• holidays;
• paying medical bills;
• funds for investment;
• renovations or work around the house; or
• furniture and appliances.

An unsecured personal loan at a low interest rate could let you enjoy these things now and help spread the cost over a set period of time

One other option is a secured personal loan. This is where you provide an asset that is used as collateral for the loan. With this loan option, a lender can seize the asset and sell it to recoup losses if you default on your loan.

As mentioned earlier, a secured personal loan typically has a lower interest rate than an unsecured loan, as it is perceived as lower risk for lenders.

When planning to take out a personal loan, it’s important to look at how repayments will fit into your overall budget. Start by working out how much you’d like to borrow, and how much your monthly repayments could be.

First, make a list of all the recurring payments you have each month or year, things like:

• rent or mortgage;
• food;
• electricity and gas bills;
• car running costs;
• insurance;
• travel costs;
• memberships;
• streaming services; and
• phone payments.

After all your outgoings have been deducted from your monthly income, you should get an idea about how much you can afford to pay back to a loan.

Just make sure you remember every outgoing you have, otherwise you could find yourself out of your depth.

The basic rule is, don’t borrow more than you can afford to pay back, without having to stress about it.

That depends on whether you opt for a variable or a fixed interest rate.

• Fixed rate. A fixed interest rate won’t vary over a fixed amount of time, so neither will your repayment amounts during that time. This can be for the life of the loan, or an agreed period, like 12 months.

A fixed rate can help you budget with more accuracy, as your payments won’t be affected by changes in interest rates. The downside is that should interest rates come down in that time, you could miss out on the lower payments.

• Variable rate. With a variable rate, your repayments can vary with the fluctuating interest rate. You could get to take advantage of any interest rate decreases, but should the rate increase, then so may your repayments.

Typically, this can be fortnightly or monthly, whatever is set out in your loan agreement. It varies between loan providers and between the type of loan you choose. Consider a payment plan that’s going to allow you to make your payments on-time, without causing you financial worries.

Yes, these no-interest loans are generally offered by lenders under the ‘No Interest Loan Scheme’ (NILS). These loans help people who are struggling financially, to get back on their feet. They are typically a source of safe, affordable credit for low-income individuals or families. For details of eligibility criteria and how to apply, go to NILS for more information.

The Australian Government’s Moneysmart website can also help with more information on no-interest loans.

No-interest loans are for day-to-day things, like essential household appliances, schoolbooks, medical services or the like. Not luxury items, just things that we need to get by.

NILS has full details on eligibility, but to start with you’ll need to:

• earn less than $45,000 a year after tax; or
• have a Pensioner Concession Card; or
• have a Healthcare Card; and
• have the ability to repay the loan; and
• have lived at your current address for at least 3 months.

If you’ve suffered financially due to Covid19, you may be eligible for the Household Relief Loan: a no-interest loan of up to $3,000 to help pay rent, utilities and general household costs. Click Household Relief Loan to check your eligibility.

If you’re ready to compare unsecured personal loans, you can start here online with iSelect.* See the range of providers and simply click on an option that suits you to begin your application.