Secured personal loans in Australia

What is a secured personal loan?

A secured personal loan lets you borrow money from a lender and put up something you own, such as a car or other asset, as security. If you don’t make your repayments, the lender can repossess this asset and sell it to recover your remaining loan balance.

Because secured loans are backed by an asset, lenders view them as less risky than unsecured ones. Therefore, the interest rates on these loans tend to be lower. 

How does a secured personal loan work?

Apart from needing an asset to be offered as collateral, a secured personal loan works much the same way as an unsecured one.

When you take out a secured loan, you agree to make regular repayments over a set period to pay back the amount you borrowed, plus any interest, fees, and charges. You can usually choose between a fixed or variable rate loan.

Interest rates, fees, and charges can vary between lenders, so it’s worthwhile to shop around and compare options that suit your needs. It’s also important to check if there’s an exit fee, should you repay the loan early.

What can you use a secured personal loan for?

You can use a secured personal loan for any number of purposes, but they are typically used for one-off purchases, rather than to cover any ongoing or day-to-day spending.

You may use a secured personal loan to:

• Buy a car 
• Pay for a wedding or holiday
• Renovate your home
• Consolidate other debts 
• Cover medical expenses
• Pay education costs

What can I use as security for my personal loan?

Different lenders will have different rules for what they’re willing to accept as security, but generally you can use an asset you own with a value the same or more than the loan amount. This could be a vehicle (like a car, motorbike, caravan, or boat) or property (equity in a home or land). 

You can also use a term deposit as security, or even another valuable possession like a piece of jewellery or an artwork.

Whatever the asset, your lender will need to establish that you own it and that its value is enough to secure the loan. Partially for this reason, you’re likely to be charged an establishment fee.

Can you use a secured personal loan to buy a car?

Yes, you can use a secured personal loan to buy a car, though most lenders offer a secured car loan specifically designed for vehicle financing. 

Secured car loans are personal loans that are purpose-built for vehicle purchases and may offer lower interest rates, longer repayment terms, and features such as balloon payments tailored to car buyers. These loans generally require the vehicle to be comprehensively insured and may impose restrictions on the car’s age. 

There may be some instances in which you want to purchase a car that does not meet the criteria to be collateral for a loan–for example, if the car is too old. In this instance, you could still take out a secured personal loan to purchase the car, but you would need to use a different asset as security. 

What are the pros and cons of a secured personal loan?

Some appealing aspects of secured personal loans include: 

• Lower interest rates: Lenders may offer lower rates since they have security in play (your asset). 
• Higher borrowing limits: As secured loans are seen as less risky, lenders may be willing to lend you more. 

Some things to watch out for include: 

• Risk of forfeiture: If you’re unable to repay your debt, your lender can seize and sell your asset to recoup its money.
• Need for an asset: If you don’t have an asset that qualifies as security, or don’t want to risk one, a secured loan may not be an option. 
• Risk of financial stress: By taking on debt rather than using savings to cover an expense, you may put stress on your finances. 
• Risk to credit score: Falling behind on your loan repayments can hurt your credit score.

How can I compare secured personal loans?

When comparing personal loans, key questions to ask are:

• Is the interest rate fixed or variable? With a fixed rate, the interest rate and your repayments will remain steady for the life of the loan. With a variable rate, your interest rate can go up or down and your repayments can vary as a result.
• What is the comparison rate? The comparison rate gives a truer picture of the annual cost of the loan by taking into account both the interest rate and ongoing fees and charges.
• What are the fees? Secured personal loans can come with establishment fees, monthly service fees, missed payment fees, extra repayment fee, and early repayment fees. These may seem small but can add up quickly if you’re not paying attention.
• What is the loan duration? Monthly repayments on a loan with a longer term will be lower, but the tradeoff is that, the longer the loan term is, the more interest you’ll pay in total.
• What features are available? Some lenders offer features like the ability to make unlimited extra repayments or a redraw facility letting you access your extra repayments if you need to. Be aware that more features can mean more fees.

How much can I borrow with a secured personal loan?

The amount you can borrow depends on your financial position and your ability to repay the loan. When working out how much you can borrow, providers will typically consider:

• Your income and expenses.
• Your personal situation (like if you have dependents). 
• Any other financial commitments you have (such as other loans or credit cards).

That said, secured loans generally allow you to borrow more than unsecured ones, since you’re putting down an asset as security.

How do I apply for a secured personal loan?

You can apply for a secured personal loan online with most lenders or in person with some banks and credit unions. When applying for a personal loan, you’ll typically be asked to supply documentation and evidence showing that:

• You are over 18 years of age and an Australian citizen or permanent resident
• You have enough income to cover repayments
• You have a reliable record as a borrower based on your credit history
• You’re in a good financial position 

Before applying for a personal loan, it’s important to read the documentation carefully, including the Target Market Determination (TMD). Understanding what you are signing up for will help you to decide if the product is a good fit for you.

What if I can’t make my secured personal loan repayments?

If you default on your secured personal loan, your lender may take action to recover its money by seizing your asset. If your asset is sold and the lender does not make enough to cover the loan amount, you’ll be required to pay the difference.  

That said, lenders will generally be willing to work with you to ease your burdens before things get to this stage. If you are worried you may not be able to make your repayments, contact your lender before you miss a payment and request a hardship variation. This is a temporary arrangement that can help you get back on your feet.

The Financial Rights Legal Centre has a sample letter you can send your lender to request a hardship variation. If you need some breathing room, you can ask your lender to:

• Postpone or reduce your repayments for a few months. 
• Reduce or even freeze your interest for a few months 
• Extend the term of your loan.
• Waive fees and penalties.
• Give you time to sell an asset in order to make your repayments. 

Your lender is not required to say yes to your request, but reaching out for help, explaining your situation, and presenting a plan for when you can go back to normal repayments could be helpful.

If you’re struggling, you can also contact the National Debt Helpline for free, independent and confidential advice on 1800 007 007.

A default on a repayment can be listed on your credit report if any payment is overdue for at least 60 days, and if the overdue amount is $150 or more.

Any defaults on your loan repayments may be listed on your credit report for up to two years. This may hurt your credit score if you later apply for any other loan, credit or other financial service.

Can I get a secured personal loan with bad credit?

If you have bad credit, you may find it harder to get a secured personal loan, even if you have an asset to put up as collateral. If you do get the loan, you’ll typically be charged a higher interest rate.If you don’t need a loan urgently, it might be wise to take steps to improve your credit score before applying.

What are the alternatives to a secured personal loan?

If you need money for an expense but don’t want to or aren’t in a position to take out a secured loan, you could: 

• Use your existing savings, or wait until you have saved up enough to pay for what you need. 
• Access cash by withdrawing extra repayments you’ve made via your home loan redraw facility. 
• Borrow with an unsecured loan, although the interest rate is likely to be higher and the maximum borrowing amount lower. 
• Pay by credit card, if you’re confident you can repay the balance by the next billing cycle. If not, you could end up facing high interest charges.

Apply for a loan via the No Interest Loan Scheme (NILS), available to eligible low income earners to pay for certain essential goods and services.