Secured Personal Loans

What is a secured loan?

A secured loan uses an asset as collateral for the funds. This means that if you don't make your repayments, the lender can repossess and sell the asset to get their money back. Offering security has several advantages, namely a lower interest rate and higher borrowing amount, as the risk for the lender is reduced compared to an unsecured personal loan. With a secured loan, the value of your asset determines how much you'll be able to borrow. You can use a secured loan for a wide range of things from cars, to weddings, to home renovations.

What assets can be used to secure a loan?

The most common collateral for a secured loan is a vehicle (new or used) and these loans are typically called car loans. Other options include the equity in your home, expensive items like fine art and high-cost jewellery or term deposits.

• What assets can I use for security?

  

Pros and Cons of a Secured Loan vs an Unsecured Loan

Secured loans aren't just for borrowers who are ineligible for an unsecured loan. Even though you put an asset at risk, if you know you'll be able to make your repayments, you may opt for a secured loan for a lower interest rate.

Alanna Glenn
Lead Publisher, Money

How to compare secured personal loans

Interest rates and fees: The interest rate is what the lender charges you for borrowing money. This is presented as a percentage per annum (per year). The lower the interest rate, the lower the cost of the loan. By comparing lenders, you can work out if the rate is competitive.

In addition to interest, you should also account for fees. This will add to the cost of your loan and can come in the form of establishment or application fees and monthly fees.

The comparison rate includes interest and fees, and is the true cost of the loan. It's presented as a percentage and displayed next to the interest rate.

Loan term: This is how long you have to repay the loan. Secured loans offer terms from 1 to 7 years. Longer terms mean lower monthly repayments, but also mean that you'll end up paying more in interest charges.

Asset requirements: Before you can be approved for a secured loan, the lender will need to accept your asset. You'll be able to compare requirements before you apply. These criteria typically include the age and value of your asset.

Repayment flexibility: Check that the repayment schedule fits your lifestyle. This can be weekly, fortnightly or monthly. You may also want the ability to make extra repayments without penalty, so you can save on interest costs and pay off the loan earlier. Tip: Variable rate loans typically offer more flexibility when it comes to early repayment.

Eligibility: Lenders will take into account your personal circumstances, including your income, credit score, assets and liabilities, when you apply.

How can I apply for a secured loan?

1. Work out how much you need to borrow and what you can afford. You can use a personal loan calculator to help you.
2. Compare lenders and loan products. Don't forget to compare interest rates, fees, early repayment terms and eligibility criteria.
3. Organise and prepare the required documentation. This will make the application process quicker. Each lender will have its own criteria and requirements, but you'll likely need to have the following documents handy:
   • 100 points of ID proving your name and that you're over 18 years old.
   • Proof you can pay off the loan. You may have to submit bank statements and payslips.
   • Details of your address and supporting bills or documents.
   • Proof of ownership of a valuable asset/property.
4. Apply. Most lenders have their applications available online and the application should only take about 10-15 minutes.

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Frequently asked questions

• What's the difference between a secured and an unsecured loan?

  • The primary difference is that a secured loan requires you to put up an asset as collateral to receive the funds. An unsecured loan does not require collateral.

• Is a secured loan better for your credit score?

  • A secured loan isn't better or worse for your credit score than another type of loan. Applying for any loan may temporarily decrease your score, but by making regular, on-time repayments, you'll usually see a positive impact on your score in the long run.

• Are secured loans hard to get?

  • Compared to unsecured loans, secured personal loans are typically easier to be approved for. This is because they are less risky for the lender - since they can claim your asset if you default on the loan.

• What happens if I default on a secured personal loan?

  • If you can't make your repayments and end up defaulting on your loan, the lender reserves the right to repossess and sell your asset to recoup their losses. It will also hurt your credit score.
  • If you feel like you're at risk of defaulting, it's always a good idea to speak to the lender and see if they have a financial hardship policy.

Written by

Rebecca Pike

Senior writer

Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio

Rebecca's expertise

Rebecca has written 188 Finder guides across topics including:

• Home loans
• Cost of living
• Budgeting