Unsecured vs Secured Personal Loans: What's the Difference?

Looking to purchase a new car, renovate your house or go on a holiday but don’t have the funds? A personal loan can help you take the next step forward, with a number of different lenders and loans you can choose from. A personal loan is where you borrow a specific amount of money, usually from a bank and then repay the debt with interest in equal payments over an agreed term. There are two types of personal loans: secured and unsecured. So which one is right for you? Let us explain the differences so you can make the right choice.

What is a Secured Loan?

A secured personal loan is a loan which requires you to pledge an asset, such as the equity in your home or a vehicle, as collateral for the loan. In the event you miss a payment or default on the loan, your bank or lender has the authority to repossess and sell your asset in order to discharge you of the loan. A secured loan often allows you to access greater amounts of finance, however, the application process may be longer and more involved as you need to give the details on the asset to be held against your loan. Lower interest rates are often offered with a secured loan and the period to pay back the loan can, in most cases, last longer than an unsecured loan.

Assets which can be used as collateral for your secured personal loan include:

• Vehicles,
• Property,
• Term deposits, and
• High-cost assets such as jewelry, fine art or other items.

Types of Secured Loans

There are five main types of secured personal loans.

1. Home loan: These are secured because your home acts as collateral for the loan.
2. Car loan: Similar to a home loan, the car itself acts as collateral for the loan.
3. Secured credit cards: The bank or lender will usually require you to make a deposit against the card’s limit, which then guarantees the loan. Banks usually do this if you are trying to build your credit history or improve bad credit.
4. Title loan: When you use a paid-off vehicle as collateral for another loan. These generally have a high interest rate.
5. Personal loan: A secured personal loan is also guaranteed by an asset, usually a car. It is generally only available on vehicles less than five years old, as a lender needs to be confident of its value.

Top 5 Advantages of Taking Out a Secured Loan

1. By offering security for your loan, it adds extra strength to your application as it is secured to an asset.
2. Generally, you will be able to borrow more (based on your affordability) if you can offer security.
3. Lower interest rate than an unsecured loan.
4. A secured loan can help build your credit score and credit history.
5. You have access to greater finance.

When choosing a secured loan, you need to carefully consider what you will use as collateral. Are you wanting to purchase a new home, or do you need to make home renovations? There is also the option of refinancing your home loan if you have equity in your home. Be aware that if you miss repayments, the bank does have the ability to repossess your home or asset. So it’s important to make sure your secured loan is repaid when it falls due. If you don’t have an asset in which to secure a loan against, then an unsecured loan may be a better option for you.

What is an Unsecured Loan?

An unsecured personal loan differs from a secured loan as it is solely reliant on your ability to make repayments through your financial means. It doesn’t need collateral to be approved. Instead of securing your loan with your car or home, a bank or lender will qualify you for an unsecured personal loan based on their eligibility requirements, employment and credit score. An unsecured loan will offer lower funds and a shorter repayment period, but it will generally come with a higher interest rate.

Types of Unsecured Loans

There are three main types of unsecured personal loans.

1. Unsecured Credit cards: While often not thought of as loans, credit cards are a form of unsecured borrowing. When you make purchases with a credit card, you're essentially borrowing money from the issuer, which you repay over time, usually with interest if not paid in full by the due date.
2. Personal Loans: These are available from banks, credit unions and non-bank lenders. Unsecured personal loans can be used for any purpose you want.

Top 5 Advantages of Taking Out an Unsecured Loan

1. There is less paperwork required so the loan should be quicker to process.
2. You can be eligible for this type of loan without needing to own a registered asset.
3. Often greater flexibility with what you can spend the money on.
4. Generally shorter repayment period than a secured personal loan.
5. In many cases they have flexible repayments and payout options.

Now that you know the differences between a secured and unsecured personal loan, you need to consider which one is the right option for you and your financial situation before you make the final decision. A secured loan is normally easier to get, as there's less risk to the lender. If you have a poor credit history or you’re rebuilding your credit, for example, lenders will be more likely to consider you for a secured loan vs. an unsecured loan, as the collateral reduced their risk.

What Should You Consider Before You Apply?

• Interest rates: Secured personal loans tend to have lower interest rates than unsecured. Banks and lenders will offer fixed and variable rates for both secured and unsecured loans.
• The amount you are eligible to borrow: Unsecured loans generally offer lower borrowing limits than secured loans, as they don’t involve collateral to back them. Be sure to consider how much you need to borrow compared to the amount you’re eligible for, as borrowing more than necessary can lead to additional interest and financial strain.
• Fees: Banks and lenders have their own individual fees. Depending on the loan, some come with monthly fees and set up fees, so make sure you compare fees before you decide.
• The flexibility of repayments: The difference here is if the loan is fixed or variable. If you apply for a fixed rate loan, you probably won’t be able to make extra repayments without penalties. Whereas variable loans are less likely to have these penalties, so you can make extra repayments and repay your loan early without problems.
• Loan terms: Compare how long the repayment period will be on the loans you are interested in. Secured personal loans usually have longer repayment periods than unsecured personal loans. Variable rate loans also usually have a higher repayment period.
• How you can use the funds: Secured personal loans can often come with restrictions on what you can use the funds for, whereas unsecured personal loans don’t. An example of this is if you are taking out a secured car loan, the bank or lender may require you to use the entire loan amount to pay for the cost of the car.

Can You Get Bad Credit Unsecured Loans and Bad Credit Secured Loans?

Yes, you can, but it will depend on your level of bad credit. Your first step should be to understand what your credit rating is, and what is listed on your credit report. You can get a free credit score check from a number of online providers. From there, you can approach non-conforming lenders like us and we will be able to work with you to determine whether you are eligible for a bad credit unsecured or secured loan.

Which Loan is the Right Loan for You

Whether a secured or an unsecured personal loan is right for you will depend on your individual financial situation. If you are unsure about which one to choose, we can help. With decades of financial industry experience behind us, Revive Financial can provide unique, professional services and financial freedom. Get in touch with us today on 1800 534 534 for a free consultation.

For more information on bad credit home loans and how we can help, check out our bad credit home loan page here.