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If you’ve looked into the possibility of taking out a personal loan, you might have noticed that people talk about them being “secured” or “unsecured”.
But what is the difference, and why does it matter to you as a borrower?
Here are some things you need to know.
What is a secured personal loan?
A secured personal loan is a loan on which the lender has taken security.
As an example, consider a car loan.
If you borrow money to buy a car, the lender will often take the car as security. That means, if you stop making repayments on your loan, the lender can sell the car to repay what you owe.
Once the loan is paid off, the lender’s interest in the car as security is removed.
Vehicles are often used as collateral for personal loans, but you can have lending secured against a range of assets, including your house, tools if you’re a tradie, or even electronic equipment or jewellery.
In comparison, when you take out an unsecured loan, the lender does not hold any security. That means the interest rate charged is usually higher for an unsecured loan than a secured one.
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How do secured personal loans work?
Here’s a general idea of how the process of taking out a secured loan might work.
Assess your financial needs
First, you’ll need to think about how much you need to borrow and for what purpose. What sort of loan are you comfortable repaying?
Choose the right collateral
Then, you can think about what you could offer as security. If you’re borrowing to buy a car or other vehicle, it will usually make sense to use that asset. In other cases, you might consider what else you have that could work, such as equity in your house.
Loan approval
From there, you can apply for your loan and work through the terms that you are offered. When you work with the team at better finance™, we help you through this process and can assist you in understanding your loan contract.
Repayment
Then, you’ll get on with repaying your loan. You’ll make regular repayments over the lifetime of your loan, which is usually between 1 and 5 years, until the loan and interest payable are repaid. At better finance™, we work with lenders who offer fixed interest rates so that you know that your repayments will stay the same over the term of your loan. You can calculate your personal loan repayments using our easy-to-use calculator.
Benefits of secured personal loans
There are a number of reasons why a secured personal loan can be a good choice.
Lower interest rates
Because there is less risk of loss to the lender when they have security, you can usually access lower interest rates on secured loans.
Higher borrowing amounts
For the same reason, lenders may feel more confident offering higher borrowing amounts, subject to your application meeting lending criteria.
Flexible repayment terms and options
We can help you find a loan structure that is an appropriate fit for your personal circumstances.
Peace of mind
When you deal with the better finance™ team, we can help you ensure that you take out a loan that you understand, and that will help you get to your financial goals.
Things to consider
As with any lending decision, it’s important to carefully consider whether a secured personal loan is the right choice for you.
There are a number of potential considerations.
Security
If you do not make your loan payments, it’s possible that you could end up losing the asset that you’ve offered as security. It’s important to understand this from the outset.
Appropriate borrowing
Lenders will only lend an amount you can repay based on your current circumstances. But it may be useful to consider how you would cope if your situation changed – are you confident that the loan repayments would remain manageable?
Details
When you take a loan, spend some time understanding the details, such as any fees you might pay if you want to repay the loan early, or any penalties that could come with missed payments. The Better team can help with this.
When should you consider a secured personal loan?
A secured personal loan could be ideal in a number of situations.
Home renovations
If you want a new bathroom or kitchen, for example, a secured personal loan could be a way to do it.
Consolidating high-interest debt
A debt consolidation loan can be a way to make debt more manageable, reducing the admin involved and potentially the overall cost, too. We can help you work out whether this could work for you.
Starting a small business
If you’ve always dreamed about working for yourself, a secured personal loan could give you the help you need to get started.
How to apply for a personal loan
If you’re ready to get started, there are a few things you can do.
Get together your paperwork
You’ll need some information for your application, such as proof of income, the details of the asset you are offering as security, your ID and proof of address.
Talk to better finance™ about your options
We can show you which lenders might be a fit for you and what the terms of your loan might look like.
Submit your application
Our online process is straightforward and fast.
Tips for improving your chances of approval
If you want to put your best foot forward, there are a few things to think about.
Choose the right collateral
Consider what you’re offering as security. If you’re not sure, we can help you work through the options.
Check your credit score
Generally, a loan approval is more likely if you have good credit. If there’s anything on your credit report that shouldn’t be there, you can have it removed before you apply for a loan.
Consider reducing your existing debt
If you have any other debt that you can pay off, this may help your application.
Provide complete documentation
The application process will be smoother if you have everything you need at the beginning. We can help you determine what information you’ll need to collect before you begin.
Show stable income
Your income is a big factor in the type of loan you might be able to access. If you need a few more months to show a stronger income pattern, it could be worth waiting.
Once you’ve got your loan…
When your loan is in place, your focus will probably shift to paying it off.
Create a budget
A budget can be a handy tool to help manage your personal finances and make sure you have the money available for your repayments on the due date.
Align your payments with your pay
It can be effective to set up your repayments on the day your pay arrives, so that you know you’ll always have the money available.
Communicate with your lender
If you’re facing any financial problems, or your circumstances change and put you into hardship, get in touch with your lender as quickly as you can. They can talk to you about the options available to you, which might include restructuring your loan or extending the payment term.
Increase your repayments
In some cases, you may be able to increase your repayments to pay off your loan more quickly. We can help you work out whether there will be any fee or penalty for doing this.
Keep collateral in good condition
Usually, if a lender has taken an asset as security, you’re required to keep it in good condition. That means maintaining your car, for example, or not damaging your boat.
Track your progress
It can be rewarding to see your loan balance fall. At first, the amount you owe might not drop very quickly, but that will change as time goes on.
If you’re wondering whether a secured personal loan is right for you, get in touch with the team at better finance™. We’re experts when it comes to personal lending, and we can help you with any questions you may have.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.