A secured personal loan requires the borrower to provide an asset as collateral for the loan, whereas an unsecured loan does not.
Those with lower credit scores or unstable income may have trouble getting approved for an unsecured personal loan. A secured personal loan may be an alternative for such borrowers, if their collateral is sufficient.
All the major Australian banks, credit unions and online lenders offer both secured and unsecured personal loans, each with their own pros and cons.
How do secured and unsecured loans work?
Before you decide on one or the other, there are several important distinctions to consider, such as:
Secured loans: In general, you must be at least 18 years old and an Australian citizen, permanent resident, or eligible visa holder to apply for a secured loan.
You’ll need to meet minimum income requirements so the lender knows you can make the repayments, and usually have an acceptable credit score and history.
You will also need an asset, such as property or savings account to use as collateral.
Unsecured loans: Eligibility requirements for unsecured personal loans are similar to secured loans, but the lender may require a higher credit score or minimum income to qualify.
Nerdy tip: Regardless of whether you want a secured or unsecured loan, you should always start with the bank you have an account with, because they will have a record of your finances and financial transactions so the loan process should be less painful than if you go elsewhere.
Secured loan: A secured loan will not only have a lower interest rate but the option of taking out the loan for a longer term, or period, if you so desire. Northern Inland Credit Union, for example, currently offers a personal loan for a new car for 6.99%. Secured loans are also generally easier to obtain even if your credit history is not great, as long as the lender deems the asset you’re putting up acceptable. Interest rates for secured loans currently fall somewhere between 6.5% and 9% amongst Australian lenders.
Unsecured loan: Unsecured personal loans attract a higher interest rate simply due to the heightened risk your lender is taking on. Interest rates for unsecured loans can vary, even across one lender, depending on your individual risk profile. For example, NAB currently offers unsecured loans for anything between 6.99% and 19.99%.
Fixed and variable interest rates
Most lenders offer a choice of fixed or variable rates for both secured and unsecured loans, though unsecured loans tend to be more variable. A fixed rate may be higher than the current standard variable rate but this may still end up being the better option in an environment like the one we’re in now, where rates have been on an upward trajectory for the past six months.
It should also be noted that fixed-rate loans are generally less flexible and may attract additional fees for early repayment.
Secured loans: The maximum amounts are almost always higher for secured loans, often by a big margin. Westpac currently has a maximum of $100,000 for secured loans such as car loans and $50,000 for unsecured loans.
Unsecured loans: This type of loans generally starts at $1000 and can go as high as $50,000 for things such as cars and caravans, though each lender’s maximum loan policy is different.
The maximum each individual can borrow can also vary considerably and will depend on factors such as your credit and employment history.
Fees and charges
Fees and charges consist of everything from application and establishment fees to monthly account fees and charges for early repayment, in some cases.
Fees also differ for secured and unsecured personal loans. Make sure you shop around for the best possible terms with regards to fees because they can add up over the term of the loan.
Secured loans: Secured loans are less flexible. A car loan falls under the category of a secured loan, for example, and can only be used to purchase the specific car agreed on with the lender. If the car does not fall within the parameters of the secured loan, the lender may require you to take out an unsecured loan instead if you cannot provide anything else as an asset.
Unsecured loans: With an unsecured loan, however, you’re free to spend the loan basically on whatever you like, because you are effectively just borrowing money like a cash advance on a credit card but with different terms and conditions and hopefully a much lower interest rate.
Tips on how to get a secured or unsecured loan
Getting your salary paid into your account and paying your bills from that account with money left over should give your bank sufficient confidence in your ability to repay the loan.
Lenders will also consider your credit rating, so pay your bills such as electricity and rent on time wherever possible. Your rating is generally based on factors like how much (if anything) you’ve borrowed in the past and whether you’ve paid previous loans and bills on time. A solid credit history is always going to stand you in good stead but even those with a poor credit history can obtain a loan if you can demonstrate that you’ve kept up to date with repayments over the past six months, for example.
Nerdy tip: If you are having trouble securing a loan from your bank for whatever reason you may have to consider reducing the amount you want to borrow or look at other loan options, but these usually come with higher interest rates and more fees.
Should you get a secured or unsecured personal loan?
As with any loan, you should always shop around to find the best conditions such as the ability to make extra repayments or pay the loan out early in its entirety without attracting penalties.
Both types of loans have their own risks. With a secured loan you could lose the asset you’ve put up as collateral. Defaulting on an unsecured loan could mean court action from the lender to retrieve the outstanding debt. Having said that, most lenders have fairly extensive financial hardship assistance policies in place for such circumstances before they resort to drastic measures.
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