Unsecured personal loans

Applying for a personal loan? Here’s everything you need to know.

We all face large expenses at times. Whether it’s something you’re looking forward to, like going on a holiday or something that comes out of the blue, like medical bills, unsecured personal loans can help you manage these drains on your savings.

Unsecured personal loans can be used to cover a variety of expenses. School fees, holidays, home renovations, weddings, and giant cutting-edge TVs are just a few reasons people apply for a loan. In fact, no matter what you want to spend your money on, chances are there is an unsecured personal loan that is right for you. So how do you find the right one? In this article, we’re going to discuss some of the options available to help you make an informed choice.

What is an unsecured personal loan?

Most people are familiar with home loans, which are “secured” by a tangible object. That is to say, if you can’t pay back the loan, the bank may foreclose on your house.

Unsecured personal loans, on the other hand, don’t require any collateral, so they can be much more flexible. Consider medical bills or wedding costs - there are no tangible assets for these sorts of loans. If you can’t make a repayment, the bank may charge you a late fee, but they can’t take your possessions.

For this reason, lenders generally consider unsecured personal loans to be being higher risk, and they charge higher interest rates to compensate. According to the Reserve Bank, the average interest rate for an unsecured personal loan is around 5-8%, while the average interest on a home loan is around 3-6%.

Different types of unsecured personal loans

Personal loans broadly fit into two categories: term loans and revolving loans.

Term Loan

A term loan involves borrowing one lump sum upfront. For example, you may borrow $10,000 to go on a holiday. As part of the contract, the lender will set the repayment amounts and their frequency, e.g., $500 per month. If you need to borrow more money later, say for unexpected repairs on your car, you will need to apply for a second, separate loan.

Revolving loan.

A revolving loan allows you to keep borrowing and repaying money over and over again. The lender will set a credit limit (the maximum amount you can borrow). You will also need to make regular minimum repayments, usually monthly.

Credit cards are a typical example of a revolving loan. The bank sets a credit limit when they first give you the card, and you can spend as much of that limit as you like. Each month the bank will send you a statement telling you the minimum amount due.

Lenders also offer products that combine aspects of both of these, such as a term loan that allows for occasional withdrawals, under special circumstances. For example, if you are ahead of your scheduled payments, the bank may allow you to redraw the excess repayments you’ve made. This can be subject to approval and fees.

Interest on unsecured personal loans

Unsecured personal loans come with two different types of interest rates: fixed and variable.

Fixed rate personal loan Variable rate personal loan
  • A fixed interest rate is locked in at the start of the loan. Usually, the repayment amounts and frequency are also set, making it easier for you to budget. If the interest rates rise in the future, they won’t affect your loan.
  • The lender may also list a comparison rate, which is the fixed rate plus any fees and charges. It gives you an estimate of the true cost of the loan.
  • Variable interest rates change over time. This means your interest rate could reduce in the future, but it could also increase. The repayments will change from month to month, making it harder to budget for them.

It is important to note that the lender may offer you an interest rate that is higher or lower than the one they advertise, based on your credit score.

Fees on unsecured personal loans

Administration fees

Most lenders will charge an upfront establishment fee at the time of taking out the loan, as well as a monthly service fee. They may also charge you for additional paperwork or statements.

Late fees

If you don’t make your repayments on time, you might be hit with late fees.

Early termination fees

Most of us would assume that paying a loan off early is a good thing. However, some lenders will charge you a fee if you pay off your loan ahead of schedule.

How do I get approval for an unsecured personal loan?

You must be at least 18 years old and have 100 points of ID.

You need to provide proof that you can repay the loan. This can include evidence of employment, payslips, bank statements, proof of your assets, expenses, or other loans you have. The lender may also have minimum income requirements.

A good credit rating is essential for an unsecured personal loan. If your credit score is low, you can use a co-signer. A co-signer is a person who is responsible for your loan if you’re unable to make your repayments.

What do I need to know about my credit score?

Because unsecured personal loans don’t have any underlying assets, lenders will rely heavily on your credit report to assess your application. Your report contains your credit history, including whether you pay bills and credit cards on time and whether you’ve overdrawn on transaction accounts. If you apply for too many loans at the same time, it will also raise a red flag, so make sure you fill out your application carefully and only submit it once.

You can get a copy of your report from a credit-reporting agency via OAIC's website.

It’s important to note that though these agencies have a lot of paid reports on their websites, according to the Office of the Australian Information Commissioner, you are entitled to one free credit report per year, and an extra free report if you have been refused credit in the last 90 days.