Secured versus unsecured personal loan


What’s the difference between a secured and unsecured personal loan and what should you consider when choosing between the two?

The difference in a nutshell?

Secured personal loan

With a secured personal loan, the borrower offers up an item they own as security (sometimes called collateral) for the loan. This means that as a last resort the lender would be able to sell that item to contribute towards their costs if the borrower can’t repay the loan.

Unsecured personal loan

With an unsecured personal loan, there is no security offered up by the person taking out the loan.

Choosing between a secured and unsecured personal loan

1. What’s the loan for?

Secured

Most lenders only offer secured personal loans for specific types of purchases, where the item you’re buying can be used as security for the loan. The most common one is a motor vehicle loan where the vehicle (a car or a motorbike usually) you’re buying is either brand new or under a certain age (often set at 5-7 years). Some lenders also take a term deposit as security, but this is less common than a vehicle.

Unsecured

You can generally take out an unsecured personal loan for a wider range of purposes than a secured loan. This is because unsecured loans aren’t reliant on a specific item being offered as security. Some examples of reasons to take out an unsecured personal loan are: home improvements, debt consolidation, paying for a wedding, going travelling, or paying for medical expenses.

2. The interest rate

Secured personal loans generally come with a lower interest rate than unsecured loans. This is because there’s less risk to the lender with a secured loan, as the borrower has offered up an item as security for the loan.

3. Information and documents you need to provide

For both secured and unsecured loans you’ll need to provide information and documents in support of your application. This is to ensure the lender has the full picture about your financial situation and your ability to pay back or ‘service’ the loan. Checking the serviceability of the loan is important to ensure the borrower doesn’t get into financial difficulty down the road.

The lender will ask you about your income, regular expenses (like rent/home loan repayments, bills, living expenses, childcare etc) and other debts you might have. They’ll ask you to provide pay slips, bank statements and other documents to support your application, whether it’s for a secured or unsecured loan.

For a secured personal loan, you’ll also need to provide documents relating to the item being offered as security for the loan. For example, you might need to give the lender copies of car registration papers and proof of purchase from the car seller.

Ultimately, the personal loan that’s right for you will depend on a number of factors. If you’d like to learn more about the type of personal loan that might best suit, take a look at the options avaliable.

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Example: secured versus unsecured

CUA members George and Jennifer recently dropped into the branch enquiring about a personal loan for a car they were looking to buy. They were considering a brand new car as they were keen to get the most up-to-date safety features (their young great-grandson would be a regular passenger!).

We discussed the various options, features and rates. Because the loan was for a new car, the Secured Fixed Car Loan was the one that best suited their needs. It also meant they enjoyed a low rate and other features like being able to make extra repayments and pay off the loan early without penalty.

- Jacqueline Stretton, Member Relationship Advisor, Brookside

Important information: Please note that this is only intended as a general guide in relation to issues you may want to consider when taking out a personal loan. It is not intended to be an exhaustive list of all relevant issues and you should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding.

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