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If you're looking for a personal loan to help take your next step towards a holiday, car or other large purchase, you might want to consider the benefits of a secured personal loan. While you might associate these loans with the purchase of a new vehicle, they are about so much more than just cars.
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A secured personal loan is a loan that is guaranteed against an asset either that you currently own or one that you buy with the loan. The most common form of secured loan is a car loan. Generally, car loans are secured against the vehicle that you are buying, though restrictions sometimes apply.
But a secured personal loan doesn't need to just be for a car purchase. You can get a secured loan for almost any legitimate purpose as long as your security is equal to or greater than the value of the loan. While the most common forms of security are generally vehicles and home equity, you can use almost any asset to secure a loan. For example, security can also come in the form of high-priced items such as jewellery or monetary accounts like term deposits. However, please note that restrictions on the type of security you can use will depend entirely on the lender.
You can usually apply for any amount up to $100,000 for terms up to 7 years with a secured personal loan.
It’s important to determine whether any type of financial product is right for you before you apply. Secured loans have tons of benefits, but they're not for everyone. Whether a secured loan is the best option will depend entirely on your personal circumstances. The best way to decide if a secured personal loan is the best option is to consider your situation and do your research and compare loan options.
Here are some points to keep in mind:
Because the lender has a backup (reselling your collateral), they face less risk should you default on the loan. For this reason, secured personal loans normally have lower or fewer fees and lower interest rates than unsecured personal loans. If you're looking for a loan at a competitive rate, a secured option is almost always going to cost you less.
If you don't have a perfect credit score, you might be hard pushed to be considered for an unsecured personal loan. However, secured loans have fewer restrictions because the lender faces less risk. If you need a loan and your credit score has a few black marks, speak to a lender about getting a secured personal loan. Using an asset as security will almost definitely be more economical than opting for a payday loan.
Having a steady income is an important factor that lenders usually consider when reviewing applicants because it gives them an indication of your ability to repay the loan. This can make getting an unsecured personal loan more difficult for these individuals. However, because there is less risk posed to the lender with a secured loan, self-employed, part-time and casual employees tend to find it easier to be approved for secured personal loans.
Do you already have an asset of value? Are you looking to buy one with the loan funds? If you don't own a valuable asset and you're not looking to buy one, a secured loan won't work for you. However, if you are looking to buy an asset, make sure that the lender you opt for accepts your specific purchase as collateral.
If you have an asset, are you willing to risk it if you default on the loan? You have to either be totally sure that you can make the repayments or willing to give up your possession if, for any reason, your circumstances change.
Lenders will have requirements for the guaranteed asset, such as its age or value. For instance, if you’re using a vehicle as security, it may need to be under a certain age, usually from two to seven years. If you are using a term deposit, you may need to have a certain amount in the account.
When looking for a secured personal loan, should you opt for a secured loan from a traditional bank or from an alternative lender? Firstly, it's important to recognise that there are different types of alternative lenders. There are building societies and credit unions known as "mutuals" (these are customer owned) as well as neobanks, P2P and independent lenders, commonly known as "online lenders".
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There are a number of different secured personal loans available, but you will typically be able to use the following assets as security for your loan:
As with any type of personal loan, there are benefits and drawbacks to consider.
You have a few options when it comes to secured personal loans:
Whether a secured or an unsecured personal loan is better for you will depend entirely on your circumstances, what you need the loan for and your financial position. To get a better idea of which one you should opt for, please see the tables below:
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Before applying for any type of secured loan, it’s important to establish whether you can afford the repayments. If you default on the loan, the asset you’ve used as the guarantee can be repossessed by the lender and sold to cover the loss.
Comparing lenders to find the most competitive options in terms of terms, rates and fees will help you find the right option for your budget and needs. Therefore, it's a good idea to consider whether you’ve done enough research prior to submitting your application.
If you default on a secured personal loan, you run the risk of your finance provider repossessing your asset. However, if you act quickly, you may be able to prevent this from happening.
If you receive a notice of default from your lender, contact them immediately for free legal advice. If you are facing financial difficulty, you may be able to come to a new and more manageable repayment arrangement with your provider.
A lender can only repossess your asset if all of the following criteria have been met:
It's also worth noting that a lender also cannot repossess your assets without a court order in the following situations:
If the asset security in question is a vehicle, a lender cannot repossess it if it is situated on your property. However, it can be repossessed if it is parked on the street. No credit provider is allowed to visit your property to repossess assets without written permission from you or a court order.
If your asset has been repossessed by a credit provider, you may still have some time. Within 14 days of repossession, your credit provider must send you a notice which includes the following:
For 21 days after you have been provided with this notice, the lender cannot sell your asset.
During this three-week period, you can get your asset back if you pay the overdue amount plus costs or the full amount owing.
During this three-week period, you can also find a buyer for your asset for at least the estimated value. You may choose to do this to ensure that the asset is sold for the best price possible, or you may choose to do so if you have a friend or relative that is willing to purchase the asset on your behalf. To do this, you must provide the details of the buyer to your credit provider in writing.
If your asset has been sold after the three-week period, your credit provider must provide you with the following:
If you have an outstanding balance, you must pay it straight away or contact your lender to set up a repayment plan.
There are a multitude of options for what you can use your unsecured personal loan for:
While getting a personal loan if you're on Centrelink payments can be trickier, it's certainly not impossible, particularly if Centrelink payments make up less than half of your income and if you are able to offer asset security.
Find out more about getting a loan on Centrelink payments in our guide.
If you've found a secured personal loan that you think would work for your circumstances, simply click "Go to site" on your selected lender and follow the online application process. Eligibility criteria vary from lender to lender – so please check the lender's specifications before applying to ensure that you qualify.
While this varies, you will typically need the following documents and details to hand in order to apply:
A car loan can be a type of secured personal loan (not all car loans are secured). However, car loans are used specifically to purchase a vehicle. The difference is the secured loan amount is restricted to buying the vehicle that will be used as security for the loan. A secured personal loan can be for purchasing a valuable asset, but it can also be for almost any purchase if you already own the asset.
If you default on a secured loan, the lender can sell your asset to recoup its losses. If you think that you are likely to default on a secured personal loan repayment, contact your lender directly and inform them prior to the default. Most lenders will find a way to defer your payment (sometimes at a fee) and prevent you from losing your asset.
Picture: Getty & Shutterstock
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