When it comes to applying for a personal loan in Australia, there are various types to choose from. Having a deep understanding of what these types are can help you decide which loan option works best for you.

Types of Personal Loans

In this article, we’ll discuss some of the most common types of personal loans that you’ll encounter. Whether you’re planning on applying for a loan for a home renovation, new car purchase, debt consolidation, or overseas trip, knowing the type of loan that you should get can help you avoid potential financial issues in the future.

Variable Vs. Fixed-Rate

When you’re applying for a loan, you’ll most likely encounter the terms variable and fixed rates. Loans with variable interest rates mean that your repayments will change if the interest rates increase or decrease. This means that when the interest rates rise, your repayments will be higher.

On the other hand, the repayments in a loan with a fixed interest rate will not change. One of the main advantages of this type of loan is that you will always know how much you will be charged by your bank each month.

Unsecured Vs. Secured

Secured loans usually require a security asset. Cars are commonly used as assets for this type of loan. If the borrower fails to repay a loan within an agreed period, the lender can acquire the asset and sell it.

Since unsecured loans don’t have an attached security asset, guarantors are usually required. Lenders may take legal action against borrowers who fail to settle their loan repayments.

Debt Consolidation Loan

Also known as refinancing, debt consolidation loans commonly involve rolling numerous debts into a single loan. Although this can provide an easy and more practical way to manage repayments, there’s a chance that borrowers might end up with higher fees and interest rates.

Loan With A Guarantor

In this type of loan, the guarantor can be a close friend or a family member of the borrower. The main role of the guarantor is to handle the loan’s repayments in case the borrower fails to settle them. Since this approach reduces the risk for the lenders, loans with guarantors can usually come with lower interest rates.

Just make sure that your chosen guarantor knows what they’re getting into and is aware of the loan’s various terms before you apply for this type of loan.

Differences Between Unsecured And Secured Loans

Out of these four main types, the most common ones that you’ll probably encounter the most are unsecured and secured loans. Although it was mentioned earlier that the main difference between these two is the presence of a security asset or collateral, there are also other factors that you need to consider when dealing with these two types of loans.

Interest Rates

Using an asset as collateral motivates borrowers to repay their loans, which means lenders take on less risk with a secured loan. As a result, they are able to issue loans with lower interest rates. Having a good credit score can also help borrowers get favourable interest rates.

Borrowing Limits

Similar to how the presence of a security asset can affect interest rates, secured loans also tend to have higher borrowing limits. This means that you’ll be able to access more money if you get approved for a secured loan.

Restrictions

When it comes to secured loans, lenders usually allow borrowers to use the money for particular reasons, such as purchasing a new car or renovating a home. On the other hand, unsecured loans have fewer restrictions. You can generally use the money as you please as long as it’s not for gambling or illegal activities. Other restrictions for the use of unsecured loans may also be set by the lenders.

Requirements

If you have bad credit, you might not be able to successfully apply for an unsecured loan since for lenders, your unfavourable credit score will be viewed as a risk indicator. But, for secured loans, lenders can be more lenient when it comes to credit requirements since the presence of a security asset means the borrower will be the one taking on the additional risk.

Choosing between an unsecured or a secured loan depends entirely on your credit score, financial background, and your needs. If you have a good credit score and are confident in your capacity to repay, then applying for a secured loan is the ideal choice simply because of its higher borrowing limits and lower interest rates.

BankWAW offers both secured and unsecured loan options with flexible terms. We also offer a wide range of personal loans that are perfect for your needs and preferences.

Through our personal loan options, you can fund an overseas vacation, purchase your dream car, renovate your home, or even upgrade your house’s energy consumption by purchasing a solar power system. We’ll help you achieve financial growth and freedom with the help of our flexible and practical loan options.