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.

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Learn more about personal loans

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 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 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 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.

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.

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.

Are there low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

Can I get a $2000 loan on Centrelink?

If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.

Some lenders may offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.

What can I use a bad credit personal loan for?

Generally, bad credit personal loans can be used for the following purposes:

  • Debt consolidation
  • Paying bills
  • Buying vehicles
  • Moving expenses
  • Holidays
  • Weddings
  • Education

Some lenders restrict how their bad credit personal loans can be used as part of their commitment to responsible lending – be sure to check before applying.

What documentation is needed for a self-employed personal loan?

Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.

While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.

Can I get a $4000 personal loan if I’m unemployed or on Centrelink?

Before most providers of personal loans or medium amount loans will approve an application, they’ll want to know you can afford the loan’s repayments on your current income without ending up in financial stress. Several lenders don’t count Centrelink benefits when assessing a borrower’s income for this purpose, so these borrowers may find it more difficult to be approved for a loan.

If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.