Secured vs Unsecured Personal Loans: What’s Best for You?

When you need to borrow money for life events such as planning the wedding of your dreams, finally taking that long-awaited holiday, you have always wanted, upgrading some accessories or modifications to your vehicle, or taking care of those repairs so you can get back on the road quickly, a personal loan can be a great option.

But did you know there is a difference between a secured vs unsecured personal loan, and each of them will have their own pros and cons?

Let’s break down what makes these loans different, so you can choose the one that fits your needs the best.

What is an Unsecured Personal Loan:

An unsecured personal loan is money you borrow without providing any security for your loan. A lender will give you money based mainly on your credit score, income, and ability to repay the loan back.

An example of this is you borrow your neighbour’s lawn mower, and they lend it to you based on your word you will bring it back. That is basically what an unsecured personal loan is, it is you giving the lender your word that if they lend you the necessary funds, you will repay the loan.

Let’s dive into the pros and cons of an unsecured personal loan:

Pros of Unsecured Personal Loan:

• No Collateral Required: Meaning you don’t need to own a home, car, caravan, etc. to qualify.
• Faster Approval Process: Without security being evaluated, these loans can typically be approved and funded more quickly.
• No Risk to Your Asset: If you don’t pay back the loan, your lender won’t take your security at all. It is in your best interest though to pay your loan back on time, as failure to do so can result in credit file defaults and legal action.

Cons of Unsecured Personal Loan:

• Higher Interest Rates: Without security there is more risk for a lender. You’ll typically pay more interest compared to secured loans.
• Stricter Requirements: Your credit score will play a huge factor in this as lower scores may have a tougher time qualifying for an unsecured loan.
• Lower Borrowing Limits: Without security, lenders will typically offer smaller loan amounts.

What is a Secured Personal Loan:

A secured personal loan is a loan that is guaranteed by an asset, such as a car. The majority of the time a lender will take security over a car, but other common types of security can include your home, caravan, etc.

Similar example as mentioned with unsecured loans, let’s say you borrow a lawn mower from your neighbour, and you leave your bicycle with them or something of value until you return their mower. If you fail to return the mower, your neighbour would be able to take your bicycle as payment to help recoup the loss. This is similar to what a lender would do if you provided your car for security and failed to repay the loan. Your lender would take the vehicle as payment to recoup their loss.

Now that we have an idea of a secured personal loan, let’s go over the pros and cons:

Pros of Secured Personal Loan:

• Lower Interest Rates: Lender has security as a backup which can usually lead to lower interest rates as less risk.
• Easier Approval: With security it will reduce the lenders risk, making these loans easier to qualify for, even with a less-than-perfect credit score.
• Higher Loan Amounts: Since the lender has security, you can often look at higher borrowing amounts.

Cons of Secured Personal Loan:

• Risk of Losing Security: If you don’t make your required payments and don’t communicate your situation with the lender, the lender can take action to retrieve their security.
• Limited By Your Security: You can only borrow against the value of what your security is.
• Longer Settlement Process: With your lender taking security, they will need to complete some extra checks on their end when it comes to valuing the security and confirming it is owned outright, so that can add a little more time on settling your loan.

Which Loan is Right for You?

When looking at the big picture for a secured vs unsecured personal loan both have their pros and cons and you are probably asking yourself the question, which one is right for me? You’ll want to consider the following for your unique situation:

Consider an Unsecured Loan if:

• You need money quickly
• You don’t own valuable assets or don’t want to risk them
• You need a smaller loan amount.

Consider a Secured Loan if:

• You own a valuable asset and willing to use as security
• You want a lower interest rate
• You need to borrow a large amount of money

If you are looking for more information around personal loans and how to compare them to find the best deal, Moneysmart has a helpful article ‘Personal Loans’ where they breakdown secured vs unsecured loans, options for a guarantor, and how to compare.

Ready to Find Your Perfect Loan?

Finding the personal loan that fits you can be stressful, but the nice thing is you don’t have to worry about doing this alone.

With us you’ll have your own dedicated lending specialist who will guide you through finding the right personal loan for your unique situation from start to finish.

Apply now for your personal loan!