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What is an unsecured personal loan? A Handy Finance guide

Financial flexibility is key in today’s fast-paced world, especially when unexpected expenses or significant purchases come up. For those without assets to use as collateral, unsecured personal loans offer a solution to borrow without pledging property or other assets. In this guide, we’ll explore the ins and outs of unsecured personal loans, covering everything from their benefits and uses to qualification criteria and responsible borrowing practices.

What is an unsecured personal loan?

An unsecured personal loan is a type of loan that doesn’t require the borrower to put up an asset, such as a car or property, as collateral. Unlike secured loans, which allow lenders to repossess the collateral if you default, unsecured loans are backed only by the borrower’s creditworthiness. This added risk means that unsecured loans typically have higher interest rates than secured loans, but they also provide a simpler borrowing process, especially for those who don’t have assets to pledge.

Uses for unsecured personal loans

Unsecured personal loans are versatile and can be used for a wide range of purposes. Here are some of the most common reasons borrowers turn to unsecured loans:

  • Debt Consolidation: Unsecured loans can help consolidate multiple debts, potentially reducing interest costs and simplifying repayments.
  • Home Renovations: Unsecured loans provide funding for smaller home improvements without the need to tap into home equity.
  • Unexpected Expenses: Whether it’s a medical bill or an emergency car repair, an unsecured loan can cover urgent expenses when savings aren’t enough.
  • Major Purchases: From buying a new appliance to covering the cost of a special vacation, unsecured loans allow flexibility in managing larger purchases.

While unsecured loans can offer immediate funds, it’s important to borrow responsibly. Consider alternative options, such as budgeting or using savings, before resorting to a loan for non-essential expenses.

Qualifying for an unsecured loan

Because unsecured personal loans don’t require collateral, lenders rely on a borrower’s financial profile to assess eligibility. Here are the main factors they consider:

  • Credit Score: Lenders look closely at your credit score to assess your reliability as a borrower. A higher credit score often results in better loan terms and lower interest rates.
  • Income Stability: A steady income provides lenders with confidence in your ability to meet monthly repayments.
  • Employment History: Lenders typically prefer applicants with a stable employment history, which suggests income consistency.
  • Debt-to-Income Ratio: This ratio reflects the proportion of your income that goes towards debt repayment. A lower ratio can improve your loan eligibility.

Improving your credit score before applying can increase your chances of approval and help you secure a more favourable interest rate. Regularly reviewing your credit report for errors and working to pay down any outstanding debt are good practices for maintaining financial health.

Borrowing responsibly

Unsecured loans can be beneficial, but it’s essential to approach borrowing with a clear plan. Here are some best practices:

  • Borrow Only What You Need: Avoid overextending yourself by borrowing more than you can comfortably repay. Use the loan solely for legitimate needs.
  • Create a Budget: Plan a budget that accounts for monthly loan repayments along with your other expenses, ensuring you can meet obligations without financial strain.
  • Avoid Impulsive Borrowing: Consider whether a loan is truly necessary for your current financial situation. Responsible borrowing helps protect your credit score and financial stability.

Ready to get started?

Unsecured personal loans provide a convenient financing option for those in need of immediate funds without the need to pledge assets. Whether it’s consolidating debt, handling an unexpected expense, or funding a major purchase, unsecured loans can offer a practical solution when used responsibly. Understanding the qualifications, loan uses, and responsible borrowing practices are key steps toward making informed financial decisions. If you’re considering an unsecured loan, Handy Finance is here to help. Use our Loan Calculator to see what your repayments might look like.

Approvals are subject to Handy Finance’s credit criteria and responsible lending requirements. Fees, charges, terms and conditions apply. Finance provided to approved applicants by OurMoneyMarket Lending Pty Ltd ABN 64 605 231 669, trading as ‘Handy Finance’ holds Australian Credit Licence number 488228 and is a member of the Australian Financial Complaints Authority (AFCA). The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances. We recommend you obtain independent advice before acting on any information in this article.