A secured loan uses an asset as collateral for the funds. This means that if you don't make your repayments, the lender can repossess and sell the asset to get their money back. Offering security has several advantages, namely a lower interest rate and higher borrowing amount, as the risk for the lender is reduced compared to an unsecured personal loan. With a secured loan, the value of your asset determines how much you'll be able to borrow. You can use a secured loan for a wide range of things from cars, to weddings, to home renovations.
The most common collateral for a secured loan is a vehicle (new or used) and these loans are typically called car loans. Other options include the equity in your home, expensive items like fine art and high-cost jewellery or term deposits.
Secured loans aren't just for borrowers who are ineligible for an unsecured loan. Even though you put an asset at risk, if you know you'll be able to make your repayments, you may opt for a secured loan for a lower interest rate.
Alanna Glenn
Lead Publisher, Money
Interest rates and fees: The interest rate is what the lender charges you for borrowing money. This is presented as a percentage per annum (per year). The lower the interest rate, the lower the cost of the loan. By comparing lenders, you can work out if the rate is competitive.
In addition to interest, you should also account for fees. This will add to the cost of your loan and can come in the form of establishment or application fees and monthly fees.
The comparison rate includes interest and fees, and is the true cost of the loan. It's presented as a percentage and displayed next to the interest rate.
Loan term: This is how long you have to repay the loan. Secured loans offer terms from 1 to 7 years. Longer terms mean lower monthly repayments, but also mean that you'll end up paying more in interest charges.
Asset requirements: Before you can be approved for a secured loan, the lender will need to accept your asset. You'll be able to compare requirements before you apply. These criteria typically include the age and value of your asset.
Repayment flexibility: Check that the repayment schedule fits your lifestyle. This can be weekly, fortnightly or monthly. You may also want the ability to make extra repayments without penalty, so you can save on interest costs and pay off the loan earlier. Tip: Variable rate loans typically offer more flexibility when it comes to early repayment.
Eligibility: Lenders will take into account your personal circumstances, including your income, credit score, assets and liabilities, when you apply.
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