Types of Personal Loans
Find out more about the various different personal loan types so you can start comparing your options with Savvy.
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What types of personal loans can I choose from?
Unsecured personal loans
Unsecured personal loans are perhaps the most commonly sought type of personal finance, as there is no requirement for applicants to put up an asset as security for the loan. You can typically borrow up to $75,000 with an unsecured personal loan. Sidestepping the security factor makes these loans one of the quickest to process and easiest to be approved for.
Because of this lack of security, though, unsecured personal loans come with higher interest rates and fees than their secured counterparts. With the lender not having anything concrete to fall back on in the event that a borrower becomes unable to pay off their loan, part of mitigating the risk that these loans pose is raising associated costs.
Secured personal loans
Unlike unsecured loans, secured personal loans do require the borrower to affix an asset as collateral as part of their financing agreement. Assets that can be used as security for these loans can include a car or another vehicle, valuable assets like jewellery, art or antiques and a term deposit.
The primary benefit of security in a personal loan is the discount on interest and fees as part of the loan, as well as a potential increase in your borrowing power up to $100,000 in some cases. However, securing an asset limits your control over it, as it prevents you from selling or upgrading it in the time that you’re repaying your loan.
Debt consolidation loans
These are ostensibly the same as an unsecured (in most cases) or secured personal loan. However, they’re taken out for the express purpose of grouping your outstanding debts under one roof. This is incredible useful, as it can make them more manageable, particularly if they all fall on different pay cycles.
It’s also important when it comes to high-interest debts such as those of credit cards, which can easily get out of hand if you fall behind on repayments. Grouping these loans into one payment can help you save a considerable amount of money.
Line of credit loans
A line of credit loan is different to the regular personal loans mentioned above in several key areas. With a line of credit, you’re approved for a set monetary limit, up to which you can withdraw funds whenever you like. These loans come without a set repayment schedule and only charge interest on the funds you owe.
The important thing to note about these particular loans is that they come with higher interest rates and account-keeping fees than a standard personal loan would, so it’s not encouraged that you sit on your loan for too long.
Student and guarantor personal loan
There are also personal loans designed for use for students who need to take out a loan to pay for any manner of things, such as accommodation or educational expenses like textbooks, a computer or further external training.
While these are only generally available for lower amounts at higher rates, one way to remedy both of these is by finding a guarantor. This is usually a parent who agrees to take on the loan should you fail to do so, adding much-needed security and enabling you to borrow more and save.
Overdrafts
Overdrafts are like a personal loan, but attached to your bank account. These enable you to withdraw from your account beyond $0 up to a pre-set limit, after which you repay at your own leisure with no set repayment schedule.
Another of the advantages of this type of financing is that you’re only charged interest on the funds you use in any given month, giving you the flexibility to access the funds as you need them. However, interest rates can be quite high on overdrafts, so they may not always be the right option for you.
Small personal loans
Small loans, or instant cash loans, are structured differently to standard personal loans and offer a fast and easy alternative for applicants who are after smaller loan amounts. These loans range from $300 to $5,000 over terms of 16 days up to two years and can be turned around as quickly as one hour after submitting your application.
Eligibility requirements are much broader with these loans, making them more widely accessible to those who wouldn’t otherwise be approved for a standard loan. Fees are fixed and capped, so you’ll know what you’re paying from the outset, and you can pay your loan out early if you wish to.
How to choose the right personal loan
How much do I need?
Whether you need a small, medium or large amount will inform your choice of loan. For instance, secured personal loans are the only option for borrowing beyond $50,000, while small personal loans are your one choice for amounts below $2,000.
How long do I need to repay it?
Similarly, you should only choose a loan that offers manageable terms for you. Whether you need up to seven years or are only looking to limit your loan term to one or two will factor heavily into the product you pick, particularly when looking at each loan’s interest and fees.
What's my employment and income situation?
Standard unsecured and secured personal loans are often the finance of choice for full-time workers who are comfortable financially, as they can access better rates and higher borrowing sums. If you’re in a less stable situation, though, opting for a small personal loan or finding a guarantor might be more suitable.
What other costs will I pay?
Different types of loans obviously come with different rates and fees, which can be dependent on numerous variables. For instance, there are ways to reduce the cost of your loan (such as having stable employment or past borrowing) that may apply to you in certain situations and not others.
