A personal loan can help you take your next step if you don’t have ready finance. Whether you want to buy a car or undertake home renovations, you’re likely to find a number of different lenders and loans to choose from.
If you’re looking to purchase an asset, or you already have one, you may be considering whether a secured or unsecured personal loan is a better option for you. We break down the differences in the guide below.
What is the difference between secured and unsecured personal loans?
The main difference between these two loans is that with a secured personal loan you have to provide an asset as a guarantee, while you don’t with an unsecured personal loan. If you default on a secured personal loan, the lender can repossess the asset and sell it to recoup its losses. The asset is usually one you are purchasing with the funds you are borrowing from the lender, but it can also be an asset you already own.
Secured and unsecured personal loans you can apply for
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Lenders are willing to use all kind of assets that hold value as guarantees for loans. Whether you are looking to purchase one of the following items or already own one, you might be able to use it as security for a loan:
Vehicles. This includes new and used cars, motorbikes, boats, caravans and even jet skis.
Property. If you own a property outright or hold equity in a mortgaged property, you can use it as security for a loan.
Term deposits. If you hold a term deposit account with a lender, they may be willing to use the amount as a guarantee for a loan.
High-cost assets. Some lenders will accept high-cost jewellery, fine art and other items as security for loans.
What type of loan is better for you?
If you’re unsure what type of personal loan you should be applying for, here are some considerations to keep in mind:
If you’re buying a vehicle. The age, cost and type of vehicle will have a bearing on whether you can or should get a secured personal loan or whether an unsecured loan will be a better option for you. Some lenders will only accept new vehicles (generally less than two years old) as a guarantee. If you want an older car, it may need to pass a vehicle inspection check and still need to be under a certain age, usually seven years.
If you want to use the loan amount for various purposes. Lenders offering secured loans tend to place restrictions on the use of the loan amount. For instance, if you are taking out a secured car loan but also want to buy some furniture, the lender may not let you borrow more than the cost of the car.
If you aren’t looking to purchase an asset. You will need to already own the asset you want to use as security. While this is a less common form of secured personal loan, it is an option offered by some lenders.
How you can compare secured and unsecured personal loans
While both types of loans are a viable way for you to finance a new purchase, you can find the option that better suits your needs by comparing them to one another. Here are some main points of comparison:
Interest rates. As secured personal loans are less risky for lenders, they tend to come with lower interest rates. You can find fixed and variable rates for both secured and unsecured loans.
Fees. You won’t find a great difference in fees between the two loan types. Expect establishment fees for both types of loans, although you can find lenders that don’t charge any fees to set up the loan. Some loans come with monthly fees, but these are not standard, so make sure to compare so you know your loan is competitive.
Flexibility of repayments. The difference lies in whether the loan is fixed or variable. If you apply for a fixed rate loan, you are more likely to find penalties for extra repayments and repaying your loan early. Variable rate loans are less likely to have these penalties. Compare lenders to find the most competitive option.
Loan terms. For both secured and unsecured loans, you will generally find terms of between one and five years for fixed rate loans and one and seven years for variable rate loans.
How you can use the funds. If you apply for an unsecured loan, you can generally use the funds for whatever purpose you want. Secured loans tend to come with more restrictions. For instance, if you’re taking out the loan to pay for a car, the lender may require you to use the entire loan amount to pay for the cost of the vehicle.
What to consider before you apply
Will you be able to afford the repayments? If you’re opting for a secured personal loan, the lender will be able to repossess your asset if you can’t afford the repayments. If you are considering an unsecured personal loan, keep in mind the interest rate is likely to be higher and so your ongoing repayments will be more costly.
How much flexibility do you want with your loan amount? If you want to use your loan to make a large purchase as well as a number of other items, check whether this is allowed by your secured loan lender. If you can’t find a secured loan that allows for this, you may need to apply for an unsecured personal loan.
Do you want a fixed or variable rate loan? Depending on the type of loan you want to take out, you may find more fixed or more variable rate loan options. For instance, if you’re considering a secured car loan, you may find more fixed rate loans than variable rate loans. It’s important to compare all available options before you apply.
The points will also come back to comparison – which option is best for you? The only way to work it out is to consider your situation, your needs and the loan type that is going to work for what you want.
Frequently asked questions
What’s the difference between a secured car loan and an unsecured car loan?
A secured car loan will use the car you purchase as security for the loan in case you default. With an unsecured car loan, you still use the funds you borrow to purchase the car, but the vehicle isn’t attached to the loan as security.
Is VET-FEE HELP loan secured or unsecured?
Your student loan, obtained through the VET-FEE HELP loan program, is unsecured.
Is there a difference between a secured loan and a secured car loan?
Yes. A car loan is a type of secured loan specifically used to purchase a vehicle. A secured loan is a general type of loan where a number of different assets, including vehicles, can be used as security for the loan.
What’s the difference between a secured home equity loan and a mortgage?
A home equity loan uses the equity you hold in your property as security and usually comes in the form of a revolving line of credit. People often use home equity loans for home renovations. On the other hand, a mortgage is taken out for the purpose of buying property, with the entire property being used as security for the loan.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
You'll receive a variable rate between 9.99% p.a. and 17.99% p.a. (9.99% p.a. to 17.99% p.a. comparison rate) based on your risk profile A credit limit up to $75,000 that you can continue to draw down over terms up to 5 years. Note: No establishment fee and no monthly account service fees apply if you apply and are approved before 31 March 2020.
You'll receive a variable rate between p.a. and 16.40 p.a. based on your risk profile A flexible loan with amounts from $2,001 and terms starting from 6 months. Interest and comparison rates calculated for a loan term of 3 years.
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