Secured vs unsecured personal loans

By   |   Updated 26th July 2021

Secured vs Unsecured personal loans

People take out personal loans for a variety of reasons. Consumer loans, car loans, rental bond loans, rent arrears loans, and loans for debt consolidation. These are all types of personal loans.

They all have similar characteristics even though we call them by different names. One of their category-defining features is whether they are secured or unsecured.

Not sure what that means? Read on to find out how secured and unsecured personal loans are similar and in which ways they are different.

What is a secured personal loan?

Secured loans are backed by an asset that you own, such as your car, which reduces the risk to the lender.

If you are unable to pay a secured loan, the lender can take possession of the asset and sell it in order to recover their loan amount and interest.

The extra financial security that comes with an asset-backed personal loan makes the interest rates lower than those of an unsecured loan.

Pros

  • Generally easier to get approved for than unsecured loans.
  • Can get approval for higher amounts depending on security.
  • Relatively lower interest rates compared to unsecured loans.
  • More accessible for people with a low credit score.

Cons

  • Not everyone has assets to offer as security.
  • Limitations on what you can do with the funds you borrow.
  • If you are unable to repay the loan, you stand to lose the asset you offered as security.

What assets can be given as security?

Assets that are accepted by lenders can vary depending on the lender of your choice and the amount you want to borrow.

These are some of the most common asset types that lenders consider as acceptable forms of security:

  • Vehicles and other high value equipment. Many lenders would consider your car as a security asset. Some may have conditions such as whether it should be a new car (i.e. less than five years old). Some lenders may accept other types of vehicles such as motorbikes, caravans, recreational vehicles, and boats. High value equipment such as farm machinery and other equipment can also serve as security for a personal loan.
  • Cash deposits. If you have savings, such as fixed term deposits, you may use that as security for a personal loan in much the same way that you would offer cash deposits to secure home loans.
  • Real estate that you own. Real estate is a very common type of loan security in Australia. Your lender may consider the equity you hold on a property, as a form of security for a personal loan. Lenders typically accept residential and commercial properties, as well as land, as security. You will have to show proof of ownership.
  • Other high-value assets. Some lenders may consider high value items such as pieces of art, antiques, or jewellery as collateral.

What is an unsecured personal loan?

An unsecured personal loan is a loan that is not backed by an asset. Naturally, this type of loan makes it riskier for the lenders because they have no way to recover their loss if you fail to repay the loan.

To compensate for that risk, interest rates for unsecured loans are generally higher than they are for a secured loan. For the same reason, they are going to take a more detailed look at your circumstances. This will involve running a credit check and requesting employment details and proof of income.

An unsecured loan also comes with a bit more flexibility in terms of how you can spend the money you borrow with fewer strings attached compared to a secured personal loan.

Pros

  • No need to offer an asset for security / collateral.
  • Funds can be used for a wide variety of things including debt consolidation, holidays, dental and medical bills, unexpected expenses, etc.
  • In some instances, funds can be deposited in your account on the same day.
  • A good credit score can help with getting a lower interest rate.

Cons

  • Some lenders, especially big banks, may not be open to working with you if you have poor credit.
  • Lenders will require a range of personal information and supporting documents, e.g. payslips.
  • Loan amounts are likely to be lower when compared to secured loans.
  • Relatively higher rates of interest compared to secured loans.

Read up on the differences between personal loans versus car loans.

Considerations

There are a few things to consider when choosing between a secured or unsecured personal loan.

  • Personalised rates using your credit score. Many lenders, especially non-bank lenders, will give lower interest rates to people with an excellent credit score. Jacaranda Finance, MoneyMe, NAB, and SocietyOne all use risk-based pricing.
  • Fixed rates. Fixed interest rate loans give you certainty (and help you budget) because you know exactly how much you need to pay each month. However, they have little or no flexibility on repayment terms. Typically, you can expect fixed loans to charge extra fees on repayments and slap you with huge penalties for paying loans off quickly.
  • Variable rates. Variable loans are typically more flexible, for example, giving you access to redraw facilities. Some lenders may also let you extend the repayment period or borrow additional amounts on top of what you have already borrowed.
  • Exit fees. You can expect to pay exit fees on fixed rate loans. Exit fees are less common with variable loans.

FAQs

Which type of loan typically has the lower interest rates?

Secured personal loans typically have lower interest rates. Those with good credit and valuable assets to offer as collateral can negotiate for better rates.

Are secured loans easier to get approved for?

Secured personal loan applications are generally approved more easily compared to unsecured loans. This is because security-backed loans pose a lesser risk to the lender, who can recover their losses by selling the asset if you are unable to pay.

Can secured loans be secured on other property, like a home?

Yes. Depending on the lender, vehicles, equipment, real estate, cash deposits, and various other types of asset may be used as security.