An unsecured loan is a personal loan offered to the borrower based on their credit record, credit score, and assessment of their ability to repay. In contrast, a secured loan is a loan that is offered against collateral, like the borrower’s home. There are many types of unsecured loans. In fact, you may already have one without realising it falls under the category of an ‘unsecured loan’. Examples of common unsecured loans include most credit cards and student loans.
What is a personal loan?A personal loan is a type of unsecured loan. You may want to take out a personal loan for a number of reasons:
- Funding your wedding
- Paying for a holiday
- Debt consolidation
- Home renovation
Typically, anything over the limit of a credit card but too small for a secured loan would fall into the category of a personal loan. Personal loans tend to have a term of 1-5 years, are paid back through a fixed monthly payment throughout the term, and have an agreed final settlement date.
What does APR mean?APR is the Annual Percentage Rate. You’ll find this against all loan types. The annual percentage rate is how much you will pay back each year on the amount you borrow. This helps you calculate the total cost of your loan over time, which also helps you compare the cost of different loan products.
Is an unsecured loan safe?Even though an ‘unsecured loan’ may sound dodgy, the ‘unsecure’ nature of the loan is in fact a consideration for the lender as it reflects how they are repaid and how confidently they can ensure this repayment. In the case of unsecured loans, lender risk is balanced against the offered APR, which is based on the borrower’s credit score (things like if previous payments have been made on time, how much you may already owe, and if you have any missed payments). Of course, as a borrower, you should always do your own research before taking out any kind of loan. Responsible lenders will do their best to avoid lending to customers who can not afford to take out a loan.
What is a secured loan?A secured loan is a way to borrow money over the long-term (five years +) and can come in many forms. The most common forms of secured loans are mortgages and other home loans. These are loans secured against the borrower’s property. In the case of a mortgage, the borrower’s loan provider would have the right to possession of the property if the borrower was unable to continue with repayments. Similarly, if the borrower leveraged their home as equity for a secured loan and they were unable to continue repayments, the lender would again have the right to possession of the property. This is one of many reasons why it is so crucial for borrowers taking out any type of loan to ensure the affordability of the loan. When in doubt, seek advice from an expert.
Secured vs Unsecured lending
In short, these are the core differences between secured loans and unsecured loans:Secured loan
- Long term
- Typically lower APR
- A larger amount of money borrowed
- Borrower provides collateral
- Eligibility based on credit record
- Smaller amount
- Typically higher APR
- Short term (under five years)
Can I get a personal loan for a car?Depending on your credit history, yes, you may be able to get a personal loan for a car. However, always ensure that you can afford to repay your loan. When a lender provides a quote for a loan to a borrower, the APR on the loan will increase or decrease in relation to the strength of the borrower’s credit score. This is because the interest rate offered on the loan is proportional to the risk the lender believes they are taking by lending to the borrower. At some point, when the borrower’s credit score is too low, instead of continuing to increase the interest on the loan, the lender will decline the borrower’s loan application. So, not only should you be very vigilant as to the affordability of your loan, you should also consider the risks associated: being unable to repay your loan will potentially result in higher interest rates or declines when seeking a loan in the future. This can be a very difficult financial cycle.
At Fluro, we ensure we’re 100% transparent from the start of the loan application process, showing the individual rates customers will be offered if they apply for a Fluro loan. We want to save potential customers time by being upfront about their personalised real rates (not a generic representative APR), ensuring everybody has the correct data to make an informed decision as to the affordability of our loan products. We also have a robust approval process which helps us to reasonably determine whether or not the customer would be able to afford to take out a loan, and we do not lend to anyone if we believe it could put them at financial risk.
Do unsecured loans hurt your credit score?Any loan can hurt your credit rating, just as repaying your loan consistently over time can help your credit rating. In short, taking out a loan and paying it back in full and on time will help improve your credit rating. Taking out a loan and being unable to make your repayments will have a detrimental impact on your credit score. As we mentioned above, ensuring a loan is affordable (over the full term, given your circumstances and the potential for them to change) is of paramount importance because not being able to repay your loan can have a lasting impact on your financial credibility. This could ultimately affect things like your ability to take out a mortgage, drastically increase your APR on future loans, or ultimately make it impossible for you to find a loan.
What is representative APR?Representative APR (abbreviated as rep. APR) is the representative annual percentage rate. It’s a system the credit industry at large employs to give borrowers a rough idea of the cost of the loan. However, at Fluro we believe rep. APR is deeply flawed so we are fighting to change the system. Representative APR is a fixed percentage representing the (highest) rate 51% of customers will be offered.
For example, if the rep. APR on a loan was 5%, and 100 borrowers applied for the loan, 51 of those borrowers would be offered a rate of 5% or less. However, 49 of those customers would be offered a rate of 5.1% or more. And, more crucially, they could go through the entire loan application only to be offered an APR of 30% or even higher.
In our opinion, this isn’t clear, it’s not fair, and it’s misleading. This is a way of discriminating against 49% of consumers by making them pay for the lower rates offered to the 51%.
Consider a second example. A borrower sees two loans. One has a rep. APR of 5% and one has a rep. APR of 10%. Unknown to the borrower, they are in the 49% of customers who will not get offered the rep. APR. The borrower spends time applying for the 5% loan and gets offered a rate of 30%. The borrower is displeased but assumes this is the best rate - it was the loan with the lowest rep. APR after all. What the borrower does not know, because there is no way of knowing from the rep. APR, is that they would have been offered a lower rate if they had applied for the 10% loan.
The absence of education around loans (and the jargon-heavy world of finances in general) is an enemy to the consumer. Not only this, it again reinforces the bias towards those who are more affluent or have been privileged enough to receive a higher education because they are more likely to be aware of credit practices. It’s a classist mechanic hidden in plain sight, disguised as a fair industry standard.
At Fluro, we’re pioneers of real rates, ensuring customers see their personal rate from start to finish.
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