powering smart financial decisions

Understanding the difference between secured vs. unsecured personal loan

Understanding the difference between secured vs. unsecured personal loan

A personal loan can be a quick way to borrow money if you need funds rather quickly but don’t have or want to use a credit card. When you apply for a personal loan, lenders will consider your income, expenses, and liabilities to determine your eligibility.

There are typically two types of personal loans, a secured loan and an unsecured loan. A secured personal loan uses an asset, such as a car, as security. In contrast, an unsecured personal loan doesn’t require any collateral or assets to secure it

If you default on a secured personal loan, the lender will repossess the mortgaged asset to recover the loss. You could either mortgage a new asset you may be buying, such as a car, or an asset that you already possess, like using home equity.

Assets that can be used as collateral for a secured personal loan

Most lenders are flexible about the assets that you can use as security for a secured personal loan. Some of the acceptable assets include:

  • Vehicles, such as cars, motorcycles, caravans, boats, and jet skis
  • Home equity either built up in a mortgaged property or a property owned outright
  • A term deposit held with a financial institution
  • High-cost items like fine art and jewellery may be accepted as security by some lenders

Comparing secured vs. unsecured personal loans

When it comes to comparing a secured and unsecured personal loan, it’s best to base your decision on your financial situation and requirements. For a secured loan because the risks assumed by lenders are less than an unsecured loan, they often offer a lower interest rate when compared to unsecured loans. Lenders provide fixed and variable rates for both types of personal loans.

Most lenders charge an establishment fee, but you can find some lenders that don’t charge them. Some loans may also attract monthly fees, and you should check these before applying as they can increase your overall cost.

When you take out an unsecured loan, there is no restriction on how you can use the borrowed money. On the other hand, lenders may restrict what you can use the money borrowed through a secured personal loan. For example, if you are taking a secured loan to buy a car, you can only use the money towards purchasing the car.

Choosing between secured personal loan vs. unsecured loan

There are certain situations where a secured loan may be a better option than an unsecured personal loan and vice versa. The following points may assist you when choosing between the two:

When buying a car

The age, type, and price of the vehicle will determine whether you’re eligible for a secured or an unsecured personal loan. Some financial institutions only accept newer vehicles as security, so if you’re buying a used car, you may not be eligible for a secured loan. Even if lenders accept an older car (usually it should be less than seven years old), it requires an inspection check before the lenders take it as a security towards the loan.

Flexibility for end-use

Some lenders may restrict the use of the money from the loan to the specified purpose and may also only approve a limited amount. So, if you want the flexibility of using the borrowed amount without any restrictions, an unsecured loan is the better option.

Things to consider before applying for a personal loan

If you default on repaying a secured personal loan, the lender may recoup their losses by repossessing the asset and selling it. On the other hand, an unsecured loan comes with a higher interest rate, and you must consider your financial situation to ensure you’re able to afford the monthly repayments.

If you’re taking out a loan to pay for multiple things like a car and some furniture, an unsecured loan is a better option as lenders may limit what you can use the funds for when you apply for a secured loan.

Often, a secured loan is available at a fixed rate, and some lenders may also provide a fixed interest rate for unsecured personal loans. Compare the various options that are available to find the best deal that suits your particular requirements and situation.

Did you find this helpful? Why not share this article?



More personal loans articles

More articles? Read more here

Learn more about personal loans