Secured Vs Unsecured Personal Loans: What's The Difference?


Original author: William Jolly

When you’re looking for a personal loan, one of the options you may have to weigh up is whether to choose a secured or unsecured loan. So, what’s the difference and what factors can you consider before deciding?

What is a secured personal loan?

A secured personal loan is a loan that is ‘secured’ against something that you own, such as your car or house. Essentially, you’re offering up an asset or part of it to protect the lender against the risk of loan repayments not being met. In the event that you aren’t able to repay a secured personal loan, the lender would be able to sell the security to help cover the value of the loan. 

This added financial security means that interest rates for secured personal loans are generally lower than for unsecured loans. Lenders may also assess potential borrowers differently if they are applying for a secured loan.

car loan
Source: muk woothimanop (Shutterstock)

Depending on factors like the lender you choose and the size of the loan you’re applying for, some assets that can potentially be used for security are:

  • A cash deposit: Similar to home loans, a personal loan can sometimes be secured by an up-front cash deposit. Depending on the lender, you may also be able to secure your loan with a term deposit. 
  • Property: Property ownership or equity in a property may also be used to secure a personal loan. This may include residential, commercial or rural land, depending on your circumstances. 
  • Vehicles and equipment: You may be able to use vehicles or equipment as security for a loan. This may include a new or used car, a boat or motorbike, or farm machinery or equipment.
  • High-value assets: Items worth a large amount, such as art or jewellery, may also be used as collateral for a loan in some cases.

What is an unsecured personal loan?

An unsecured personal loan does not require the borrower to put forward an asset or other form of security to protect the lender. With this kind of loan, the lender would typically place more emphasis on other factors relating to the borrower’s finances, such as their income and credit rating, in order to determine their capacity to repay the money. If a borrower can’t repay an unsecured loan, they would not automatically lose a secured asset. However, the lender would likely still take action to recover the money. Because the risk to the lender of potentially losing some of its money is theoretically higher, the interest rate that you will be charged as a borrower is usually higher as well.

Interest rates and costs on secured and unsecured personal loans

The overall cost of a personal loan will depend on factors such as the amount you borrow, the loan term (how long the loan lasts), the interest rate on the loan and any establishment or ongoing fees charged. Whether the loan is secured or unsecured may impact some of these factors, meaning it can also influence how expensive the loan is to the borrower in total.

To give you an idea of what the difference could be, the table below shows the average interest rates and fees for secured and unsecured personal loans on Canstar’s database at the time of writing, based on a loan amount of $20,000 over five years:

Personal loans
Secured loan Unsecured loan
Loan amount $20,000 $20,000
Repayment term 5 years 5 years
Average interest rate 7.87% 12.50%
Monthly repayment $404 $450
Average application fee $202 $177
Average ongoing annual fee $37 $48
Total repayment over 5 years (including fees) $24,643 $27,417
Source: as at 8 July 2019

Remember, while the calculations above use the average interest rates for personal loans on Canstar’s database, the actual rate charged on a secured or unsecured personal loan can vary depending on several factors, including the borrower’s personal circumstances. You can compare personal loan interest rates and fees with Canstar.

What about secured car loans?

Many lenders provide loans specifically for customers who are purchasing a vehicle. Generally, these are structured similarly to a secured personal loan, using the value of the vehicle being purchased as security. Lenders sometimes place limits on the minimum value and the age of the vehicle used as security, and the interest rate charged may depend on whether the vehicle is new or used. For example, at the time of writing, the average interest rate for a new car loan across the Canstar database is 10.70%, compared to 10.92% for a used car loan. The lender may also specify how the car loan amount can be used – for example, the use of car loan funds may be limited to purchasing a vehicle intended for personal use.

Again, the figures above are averages and the interest rate you end up getting will depend on your own circumstances and the lender you choose. It could be worth comparing your options to find a product that suits your needs.

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