Unsecured loans, also known as personal loans, are an effective way to pay for something special. Whether you’re planning a holiday or a home renovation, an unsecured loan can help you make these dreams a reality.
However, before you sign off on a personal loan, make sure you fully understand what you’re getting yourself into. In this ultimate guide to unsecured loans in Australia, we’ll go in-depth about how these specific loans work and how to make sure you’re getting the best deal.
How Do Unsecured Loans Work?
First, let’s take a moment to understand how exactly unsecured loans work. As we said earlier, you’ll likely hear these loans called personal loans since they’re not taken out for a specific purpose like a mortgage or a car loan.
If you get a personal loan, you’ll need to agree to pay your loan back within a specific period of time which is usually between 1 to 5 years. In addition, you’ll also need to pay fees and interest on the amount you borrowed. That’s why it’s so essential to shop around and understand just what you’re agreeing to so you’re confident this is something you can afford.
What’s the Difference Between a Secured vs. Unsecured Loan?
A lot of people are confused about the differences between a secured and unsecured loan. In general, secured loans offer lower interest rates, but you’ll also need to put up what’s known as an asset in order to secure the loan. This is usually your home or a car in the case of a mortgage or a car loan.
These loans are “secured” because the bank can simply reclaim your home or car in case you’re not able to pay your loan back on time. This makes it less risky for the lender, hence the lower interest rates.
On the other hand, with an unsecured loan, you don’t have to put an asset as a security. This drives up the interest rate, and you also need to assure the credit provider that you’re actually financially able to repay your loan.
What Are Unsecured Loans Used For?
What exactly are unsecured or personal loans used for? There are a number of reasons why people might decide to apply for a personal loan, and some of them might surprise you.
Ultimately, it’s up to you to understand that just because you can take out a loan doesn’t necessarily mean that you should. Before applying, ensure you’re not agreeing to repay more than you can afford. Here are the top reasons people apply for personal loans:
- Consolidate debt – One of the most common reasons people apply for personal loans is to consolidate their debt, usually credit card debt. If you’re struggling to manage multiple deadlines, this can be a great option.
- Home remodel – Investing money in your home could lead to a big return on your investment, so it’s no wonder so many homeowners use personal loans to fund a remodel.
- Moving expenses – Moving to a new home can be costly! A personal loan can help you afford a particularly large move, especially if you’re moving to a new city.
- Medical bills – Though we’re blessed with affordable healthcare in Australia, occasionally personal loans might be used to fund things that aren’t covered or that exceed our coverage.
- Wedding – Big weddings are becoming more and more popular, and some people are actually taking on loans to help afford these celebrations.
- Holiday – Finally, it’s not unheard of for people to use personal loan funds to afford a dream holiday.
At the end of the day, you need to make sure you’re borrowing responsibly. Taking on too much debt could be a slippery slope if you’re not careful. Make sure you have a budget in place before pursuing an unsecured loan!
How to Apply for an Unsecured Loan
If you’ve decided on an unsecured loan, how do you start the application process? As we mentioned earlier, these loans are more risky for lenders, so you’ll need to be prepared to show your creditworthiness. Follow these steps to make sure you’re on the right track:
- Check your credit – Your first step is to check your credit rating. This will help you recognise if you’re in a good position to afford a loan as well as the types of loans that will be available to you.
- Gather your documents – Next, you need to gather some financial documents. Credit providers will not only look at your credit report, but they’ll also want to see payslips, bank account statements, and any copies of other credit contracts or bills.
- Shop around – From here, it’s time to start shopping around. Different lenders will offer different rates, terms, and perks based on your credit score and financial standing. Beware of intro rates that might seem great at first glance.
- Submit your application – Finally, you’ll submit your loan application to one or a few different credit lenders. Now, it’s up to you to see your offers and decide who to go with for your personal loan.
Because this can be a complicated process, it’s worth talking to a financial expert before applying. The professionals at Debt Busters can help you look for the best rates, create a repayment budget, and make sure you’re staying on track for your financial goals.
What Are the Risks of Unsecured Personal Loans?
When used responsibly, personal loans can be an effective way to build your credit score. If you make all of your payments on time and according to schedule, you can actually improve your credit rating. In addition, these loans might help you improve your own assets, such as if you use them to renovate your home or even pay off your credit card debt faster.
That being said, there is some risk. If you fall behind on your repayments, this will negatively affect your credit rating. The credit bureaus consider your ability to make payments on time as one of the biggest factors when determining your credit rating.
Finally, if you’re unable to keep up with payments at all, creditors could take legal action against you. It’s important that you truly weigh the pros and cons before deciding to take on an unsecured personal loan.
How to Get the Best Rate on a Personal Loan
Last but not least, let’s talk about the ways to get the best rate on a personal loan. You’ll quickly notice that there are a lot of confusing factors that affect your interest rate when applying for an unsecured loan. Here are the best tips to improve your odds of a better interest rate:
- Improve your credit health – The best thing to do is to improve your credit health. You can do this by making all of your payments on time, using 30% or less of your available credit, and keeping your oldest accounts open.
- Avoid opening new lines of credit – When you’re trying to improve your credit, avoid opening any new accounts. Only open accounts you really need and when you can afford it.
- Apply with a co-signer – If you’re not successful applying for an unsecured loan, you can apply with a co-signer who has better credit. This will improve your odds of securing a better loan rate.
- Watch out for scams – Unfortunately, there are a number of scams out there that target people looking for personal loans. Remember to always do your research. If an offer seems too good to be true, it probably is.
- Read the credit contract – Before you sign a credit contract, make sure you read it fully. This is where having a professional’s help really comes in handy. Confirm the amount you borrowed, the interest rate and fees, and the amount of repayments. You want to fully understand all of the terms and conditions.
- Avoid high-risk debt – If you’re unable to find a reasonable interest rate, it’s likely best to avoid a payday or cash loan altogether. Short term loans with high interest rates are a recipe for financial disaster. Instead, wait until your credit is improved and you stand a better chance of a fair rate.
Is an Unsecured Loan Right For You?
At the end of the day, there are both advantages and disadvantages to unsecured personal loans. How do you know if it’s right for you? It’s all down to what you can afford. If you have a budget and strategy for paying it back on time, it’s likely an effective way to achieve your financial goals.
On the other hand, if you’re still building your credit and you don’t have a plan for paying it off quickly, it’s better to wait. When in doubt, take your time. Don’t rush into a high-interest loan you can’t afford.
If you need help deciding whether an unsecured personal loan is right for you, contact Debt Busters today on 1300 368 322 to work with our credit specialists. This isn’t a step to take lightly, so make sure you have the best budget and plan to move forward with confidence.