Small Unsecured Loans – what does that mean?
If you are looking around for small cash loan products such as payday loans or cash advances, you may have come across this term: small unsecured loan. For those of us who aren’t bankers or work in finance, these terms can cause more than a little bit of confusion. In this blog post, we’ll break down what a small unsecured loan is and how it works.
First things first – defining small unsecured loan
A small unsecured loan is a loan product which an individual can take out that is small in size and does not have a security. These loan products differ from car loans or home loans (mortgages) because the sums borrowed are smaller and the loan terms are much shorter, usually in the range of weeks or months rather than years.
How small is small?
Small loans are generally in the range of hundreds up to a couple of thousands. It’s not uncommon to take out loans as small as $50 or $100 to just cover the gap between bill time and pay day. Generally small cash loans have a maximum limit of $2,000 without a security. Loans greater than $2,000 may be defined as a personal loan, a product that larger banks and other financiers offer.
What is a security?
A security is what’s known in everyday terms as “collateral,” an object of value that the loan is taken out against. In the unfortunate event that a borrower cannot fulfill their loan repayments and obligations, the security is possessed by the bank or financial institution they owe money to. In the way of car loans or home loans, the car or house is the security on the loan.
Unsecured loans defined
What’s known as an unsecured loan means that there is no object of value that the loan is meant to be paying off. This gives borrowers flexibility to find finance when they find their funds are running low for whatever reason. They don’t have to offer a possession to gain finance. However, as there is no security for the bank or lender, this usually means higher interest rates in comparison to secured loans. This also applies to car loans that are offered on an unsecured basis – the interest rates charged for unsecured car loans are significantly higher than secured loans. This is because if the borrower doesn’t pay them back, the bank loses all the money they lent out.
Why do people take out these loans?
Many people from all walks of life and all over Australia take out small unsecured loans for a variety of reasons. People often find that their finances cannot cover sudden unexpected bills such as an uninsured ambulance fee, medical costs that are not covered by Medicare, urgent repairs such as those for burst water or gas pipes or electrical boards, a replacement computer for a small business or a sudden death in the family. Other bills such as the “triple whammy” of paying registration, drivers licence renewal and comprehensive car insurance can wipe out your pay cheque and whatever savings you might have in one hit.
Gaining personal finance without a security is generally very difficult. Banks will turn people away for such small sums of money, even if the borrower has good credit. Small unsecured loans help people to cover these costs and stabilise their finances in the long term. Smallloans.com.au is one of Australia’s leading providers in these small unsecured loans.