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?



Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By submitting this form, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.


Learn more about personal loans

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

What is a secured bad credit personal loan?

A bad credit personal loan is 'secured' when the borrower offers up an asset, such as a car or jewellery, as collateral or security. If the borrower fails to repay the loan, the lender can then seize the asset to recoup its losses.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.