Unsecured vs. Secured Loans: What's The Difference?

In the world of money-lending, it seems there are unending options when it comes to the type of loans you can take out. Home loans, payday loans, small business loans, personal loans… and then there's unsecured personal loans and secured personal loans.

If you've been shopping around for a personal loan, you may have seen these two terms pop up quite often. But what is the difference? What is a secured personal loan vs unsecured, how is it affected by interest, and which one is best suited to you?

Secured Personal Loans

What is a secured personal loan?

In brief, secured personal loans are loans taken out with safekeeping in mind. They are personal loans guaranteed by an asset – usually something of worth, such as your car. This asset is used as a form of security by your lender in the situation where you cannot repay the loan. If this happens, they will take possession of your chosen asset and sell it in order to recover the loss of you being unable to repay your loan.

Because secured loans use this form of security, they usually come with lower interest rates than unsecured loans.

What assets can be used as security?

Belongings that can be used as security differ from lender to lender, but here are a few things you can put toward your secured loan:

  • Cash deposit. Some secured personal loans can be guaranteed with the use of a cash deposit – similar to what you would do when taking out a home loan.
  • Property. If you own property (or equity in a property), this can also be used to secure your personal loan.
  • Vehicles. Vehicles and equipment are also acceptable means of securing a personal loan, depending on your lender. Cars, boats, motorbikes and even farm machinery can be used.
  • Other high-value items. If you happen to have any other items of high value such as jewellery, they can also be used as security when you take out a personal loan.

What about secured car loans?

Secured car loans are used to take out a loan to purchase a car, which is then used as collateral if you fail to repay the loan. You don't have to buy a brand-new car – some lenders allow you to take out a secured car loan for vehicles up to 12 years old. The car you're planning to buy is required to be in good condition, however. By using the car you've purchased as security, your secured car loan will come with reduced interest rates, and these can be either fixed or variable.

Secured Loans For Bad Credit

Having bad credit can make financing difficult for some people, blocking them from the essential money they need. There are numerous lenders out there who promise a "fair go" for individuals with bad credit or who are receiving benefits, and they have the same requirements – a car, motorbike, caravan or similar vehicle with a value equal to or greater than the secured bad credit loan.

Taking out this sort of loan usually comes with higher interest than if you were to take out a secured personal loan with good credit.

Need some more information about good and bad credit? Check out our ultimate guide to credit scores.

Unsecured Personal Loans

What is an unsecured loan?

Unsecured personal loans differ to their secured counterpart due to lenders not requiring some form of collateral in order to take out the loan. The purpose of these loans is flexibility: you can take out an unsecured loan for just about anything, including holidays and personal purchases.

Unsecured Personal Loans For Pensioners

When you take out a personal loan (unsecured or otherwise), your age and employment status are some of the first things to be considered by a lender. In fact, most lenders have strict lending criteria for those receiving a Disability Support Pension, Age Pension or Carer Allowance. This can make it difficult for pensioners to secure a loan. So, what options do pensioners have?

There are numerous financial institutions that will grant unsecured personal loans for pensioners, granted they can prove a steady income or some form of benefit. These include:

Unsecured Loans For Bad Credit

It can be difficult for those with bad credit to get approved for a personal loan or credit card, but a way around this can be to take out a payday loan. These are a form of unsecured loan (usually no more than $2,000 with a one-year timeframe) that won't require any collateral to take out. Payday loans are considered to be an expensive form of credit however, so you should think carefully before applying for one.

How To Compare The Types Of Personal Loans

You can use comparative websites such as Finder to compare personal loans, or do a bit of legwork yourself and do your own form of comparison. When doing this, you should:

  • Get quotes from at least three different lenders
  • Look for lenders that allow you to compare without hard credit enquiries
  • Look at the overall cost of the loan and how often interest compounds
  • Always read the fine print.

When it comes to unsecured personal loans vs secured personal loans, it's important to know which is the right loan for you. Talk to us today, and find out how we can help ease your financial stresses.