Personal Loans: Secured vs. Unsecured. What's the Difference?

Have you ever wondered what the difference really is between a secured and an unsecured personal loan?

It’s an important distinction that can affect things like the interest rate you might pay.

Here’s a quick guide to the difference between secured and unsecured loans and why it matters.

What are secured loans?

A secured loan is one for which the lender has taken security.

That means that you, as the borrower, have offered up something (usually your car or other vehicle) as collateral.

If you don’t pay back your loan, the lender can take that security and sell it to recover what you owe.

This might be the case for a car loan, for example. The vehicle you buy is the security for the lender for the loan. If you miss a payment, the lender can sell the car.

Secured loans are often used for big-ticket items or expenses, such as vehicle finance, large purchases for your home, or the loan for your house itself.

Benefits of a secured loan

Lower interest rates

Because the lender has the added security of collateral, secured loans typically come with lower interest rates than unsecured loans. This can result in significant savings on interest payments over the life of the loan.

Longer repayment terms

Secured loans may offer more flexible repayment terms, which can help you manage your monthly payments more easily. It can be beneficial for those looking to consolidate high-interest debt or finance a large purchase.

Higher borrowing limits 

With collateral in place, lenders may be more willing to offer larger loan amounts (subject to you meeting serviceability requirements), making it a good option if you need to finance a significant expense, such as a home renovation or starting a business. 

However, note that there is one significant aspect of secured loans that does not apply to unsecured borrowing.

Risk to your assets: In the event that you’re unable to repay the loan, there’s a risk of losing the asset you've put up as collateral, which could have a significant impact on your financial situation.

What is an unsecured loan?

When you take out an unsecured loan, you do not have to provide anything as security.

Your application will be assessed on factors such as your creditworthiness as a borrower, your income and your financial history.

You may find that there are fewer restrictions on how the money is used when you take an unsecured loan. This could be an important consideration if you’re borrowing to pay for an unexpected expense that won’t result in you owning an asset – maybe you need to travel at short notice, for example.

Things to note about unsecured loans

Higher interest rates

Because there's no collateral to secure the loan, unsecured loans generally come with higher interest rates. This can result in more expensive monthly payments and increased overall borrowing costs. 

Shorter repayment terms

Unsecured loans often have shorter repayment terms, which means you'll need to pay back the loan faster. In turn, you may have to accommodate higher monthly payments (again, depending on your affordability). But this could mean you’re debt-free earlier, too.

Lower borrowing limits 

Without collateral, lenders may be more cautious about the amount they're willing to lend. This can make unsecured loans less suitable for financing larger expenses or consolidating significant amounts of debt. 

Credit score matters 

Your credit score plays a significant role in determining whether you'll qualify for an unsecured loan and at what interest rate. A strong credit score is essential for securing better rates and terms. It's important to maintain good credit habits, such as paying bills on time and keeping your credit utilisation low, to improve your opportunity of qualifying for favourable loan terms. 

Factors to consider when choosing between secured and unsecured loans

So, how do you decide what option is likely to be better for you? If you’re trying to work out whether you should apply for a secured or unsecured loan, there are some key things to think about.

• Your financial situation

  As with any lending, you should only take out a loan that you can afford. Consider what sort of repayments you can cope with in your budget and what sort of interest rate is affordable. It’s always a good idea to have your financial life in order before you apply for a loan, but it may be extra important if it’s an unsecured loan where the lender only has your ability to make your repayments to rely on in its assessment.

  If you're borrowing a smaller amount or prefer not to use an asset as security, you may choose to apply for an unsecured loan. 

• Your credit score

  If your credit score is not great, it may be harder to apply for an unsecured loan. Lenders may want security to be sure that you will repay any money you borrow. The better finance™️ team can help you examine your options.

• Risk tolerance

  If you have a secured loan, there is a risk that you could lose your collateral if something happens that means you cannot repay the loan. This can be mitigated by ensuring that you only borrow an amount that is appropriate for your circumstances.

• Asset ownership

  To have a secured loan, you will need to own assets, usually a vehicle or something similar. If you do not currently have any assets that could act as collateral for a loan, you may be limited to unsecured borrowing.

Conclusion

It’s important to take the time to find a personal loan that’s a suitable fit for you, whether that’s secured or unsecured. The expert team at better finance™️ is on hand to help you through the application process and to answer any questions you may have.

 Disclaimer: This article is for general information purposes only. While we aim for accuracy, the information provided is subject to change and may not suit your specific circumstances. Always do your own research and consider seeking independent advice before making any financial decisions.