It’s easy to feel overwhelmed when choosing a personal loan. With so many options available, it can be hard to compare the differences and advantages of each offer. If you’ve been looking for a while, you may have already heard about secured and unsecured loans and wondered if they were right for you.
So, what are the differences between secured and unsecured loans? And are there any advantages to picking one over the other?
What is a secured loan?
A secured personal loan is a type of loan agreement where the borrower puts up some form of valuable collateral, such as a car, as security for the loan. This type of loan is often used when buying an asset like a car, bike, or boat. If you were to use a secured loan to buy a car, the car could be used as security for the loan.
Another way to look at it is that secured loans are like home loans – in both cases you use the value of your asset as security to borrow and pay off your loan.
While secured loans are usually used when buying a new asset, they can be taken out for other personal purchases too, such as a holiday or renovation.
Features and benefits of a secured loan
The main benefit of taking out a secured loan is that your interest rate is normally lower than it would be for an unsecured loan, allowing you to save more in the long run. In addition to this, secured loans normally offer a longer loan period, meaning that you have more time to repay your loan.
Another benefit of secured loans is that you can typically borrow more than the value of your security, normally up to 120%. For example, if you use your new car that’s worth $40 000 as collateral, you may be able to borrow up to $48 000 for your loan. With a secured loan, most banks will typically allow you to borrow up to $100 000, compared to the $50 000 limit they normally offer for unsecured loans, which is another bonus.
Other features may vary depending on who provides your loan, but they typically include the ability to make extra repayments without penalty, pre-approval or quick approval, and the ability to set a fixed interest rate.
Disadvantages of a secured loan
While secured loans have many benefits, there are some disadvantages that you should be aware of.
The primary one is that if you are unable to repay your loan, the asset you used as security can be taken by your loan provider and used to pay off your loan. This is an important disadvantage to consider, especially if you are using a high value and necessary asset, such as your car.
Another disadvantage is that because secured loans allow you to borrow significantly more, there is the risk that this loan will become a debt you won’t be able to pay off. It is important to carefully consider your finances when taking out a high secured loan, and ensure you borrow from a responsible lender.
What is an unsecured loan?
Unlike a secured loan, you don’t have to provide any security to your lender to take out an unsecured personal loan. These loans can be used for a variety of things as long as they are for personal reasons, such as a car or holiday.
Features and benefits of an unsecured loan
As we mentioned above, the main benefit of an unsecured loan is that you don’t have to put up one of your assets as collateral. This can reduce stress and means you won’t forfeit your asset if you fail to meet repayments.
Because unsecured loans normally don’t allow you to borrow as much as secured loans, they can be easier to manage and repay.
Other features of unsecured loans will vary depending on the loan provider, but some loans allow you to either lock in an interest rate or provide a variable loan option if you prefer. They usually also offer flexible repayments, don’t penalise additional payments, and offer pre-approval or quick approval.
What are the disadvantages of an unsecured loan?
The higher interest rates are the primary disadvantage of unsecured loans. With interest rates rising across the market, this may be something to keep in mind when researching and comparing personal loans.
Another disadvantage is that you typically have less time to pay off your loan, with most lenders providing a one-to-five-year repayment plan as compared to the one-to-seven-year plan offered for secured loans.
In addition, most unsecured loans will only allow you to borrow up to $50 000, whereas secured loans can offer much more. This does depend on your lender, as some lenders may offer more for unsecured loans, but it is a disadvantage you should be aware of.
Considering a loan? Here’s what you’ll need
Calculate your Personal Loan repayments
If you are thinking about applying for a personal loan with us, here are a few things you’ll need:
1. Eligibility requirements
To take out a personal loan, you must be at least 18 years old, be an Australian permanent resident, and have a satisfactory credit history.
2. Personal identification
You’ll need to have some personal information to apply. This includes your name, address, and contact details, along with a form of ID such as a driver licence, passport, or photo card.
3. Current employment and/or income information
You will also need to provide your current employment details, with either your most recent payslips or a signed letter from your employer stating your role, gross income, and how long you have been employed with them. If you are self-employed, you can provide your personal and business tax returns. You will also need to provide proof of any other income you receive, such as rental income or child support.
4. Other loans or obligations you currently have
If you have any other loans or debts, you’ll have to provide their details as well to prove they’re up to date. You may also have to provide your rental details if you currently rent.
5. Details of your loan
Finally, you’ll need to provide some details for the loan you want to take out. If you’re using the loan to buy a car, boat, or other vehicle, you’ll need to provide its current registration papers, or a dealer’s invoice.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.