Secured personal loans
Car loans, rental bond loans, renovation loans and debt consolidation loans are all personal loans by different names, and each is either secured or unsecured.
A secured loan is backed by an asset you own, most often a car. If you can't repay, the lender can take the asset and sell it to recover what you owe, including interest. That lower risk for the lender usually means a lower rate for you.
- Usually easier to get approved, including if you're new to credit.
- Often a higher limit and a longer term, depending on the asset.
- Lower rates than unsecured loans, as a rule.
- You need an acceptable asset, and you could lose it if you fall behind.
- Some secured loans limit what the money can be used for, such as buying the car that secures it.
- It can take longer to arrange, as the lender checks and registers the asset.
What can be used as security
Each lender sets its own rules, depending on the asset and how much you want to borrow. Common types are:
- Cars, often with an age limit such as under five years old, and with some lenders motorbikes, caravans, boats or farm machinery.
- Cash in a term deposit or savings account.
- Equity in property you own, such as a home, investment property or land. That usually means a home loan top up rather than a personal loan.
- With a few lenders, valuable items such as art, antiques or jewellery.
Unsecured personal loans
An unsecured loan isn't backed by any asset. The lender relies on your income and credit history, so it looks harder at both, with a credit check and proof of income and employment, and charges more for the extra risk.
- Nothing you own is at risk, though the lender can still take legal action to recover the debt.
- You can use the money for almost anything, from a holiday or medical bills to paying off other debts.
- Often quicker to arrange, sometimes the same day.
- Higher rates and lower limits than secured loans.
- Harder to get with a poor credit history; some banks won't lend at all.
- More paperwork about your income and finances.
Other things to weigh up
- Personalised rates. Many lenders set your rate from your credit history and circumstances, so the advertised starting rate may not be the one you're offered. Some let you check your rate without affecting your credit score.
- Fixed rates. Your repayments stay the same, which helps with budgeting, but extra repayments may be limited and there's often a fee to pay the loan off early.
- Variable rates. Your rate can change, but these loans are often more flexible, with free extra repayments and a redraw facility.
Choosing between them
If you have a suitable asset and want a lower rate, a secured loan usually costs less. If you don't want anything on the line, or need the money fast, an unsecured loan may suit better. Either way, compare the comparison rate, which adds the lender's standard fees to the interest rate.