The short version
- A secured loan is backed by an asset, usually a car, which the lender can take if you don't repay.
- That security usually brings a lower rate than an unsecured loan.
- Check what the lender accepts as security, such as the car's age, before you apply.
How a secured personal loan works
With a secured loan, you offer an asset as security, most often the car you're buying with the loan. If you can't repay, the lender can repossess and sell that asset to recover what's owed. The asset stays with you while you repay, and once the loan is paid off the lender's interest in it is removed.
Because the lender has that protection, secured loans usually come with lower rates and higher borrowing limits than unsecured loans, and can be easier to get approved.
What secured loans are used for
- Cars, motorbikes, boats and caravans. This is the most common kind, with the vehicle you're buying as the security.
- Renovations, secured against your home, often through a top up of your home loan or a second mortgage.
- Almost anything else, such as a holiday, wedding, study or paying off other debts. These are usually unsecured, but offering security can bring the rate down.
When a secured loan makes sense
- You'd like a lower rate and have an asset the lender accepts.
- You're new to credit, or an unsecured lender has turned you down, and security tips the decision your way.
- You already have other debts. Lenders look at how much of your income goes on repayments, and security can make them more comfortable.
- You need to borrow a larger amount than unsecured lenders offer.
What can be used as security
Each lender sets its own rules, and may value the asset before approving the loan. Common choices are:
- A car, motorbike, boat, caravan or truck, often the one you're buying. Many lenders limit how old a vehicle can be, and ask for comprehensive insurance.
- Property, such as a house, unit or land. If it already has a mortgage, a lender may take a second mortgage when you have enough equity.
- Cash in a term deposit or savings account. The rate you pay on the loan will almost certainly be higher than the rate the deposit earns.
- Shares and other investments, with some lenders.
- Valuable items such as jewellery or art, with a few lenders.
Pros
- Lower rates. The security lowers the lender's risk, and it usually passes some of that on in the rate.
- Higher limits. Lenders often lend more against good security.
- Easier approval. Security can help if your income or credit history is borderline.
Cons
- Your asset is at risk. If you can't keep up, the lender can repossess it.
- Limits on the asset. Many lenders only accept cars under a certain age, or in good condition.
- More steps. The lender registers its interest on the Personal Property Securities Register, which can add a small fee.
What to compare
Look at the comparison rate as well as the interest rate. The comparison rate adds the lender's standard fees to the interest rate for an example loan, so it shows the cost of two loans on the same footing.
Then look at:
- The term. A longer term lowers each repayment but costs more interest overall.
- Which assets the lender accepts. Some take only cars under a certain age; others accept property or cash.
- Fees, such as an establishment fee, a valuation fee for the asset, and monthly or yearly account fees.
- Late payment and early repayment fees, which the comparison rate doesn't include.
Secured or unsecured?
- Rate: secured loans usually have lower rates, because the lender can fall back on the asset.
- Approval: offering security can make approval more likely.
- Risk: with a secured loan, falling behind can cost you the asset as well as hurting your credit report. With an unsecured loan, the lender can still take legal action to recover the debt, but can't take a specific asset.
- Speed: unsecured loans can be quicker, as there's no asset to check.
Alternatives
- An unsecured personal loan. Nothing is at risk, though the rate is usually higher.
- A car loan from the dealer or carmaker. Carmakers sometimes offer low rates on particular models, but check the drive away price too.
- Redraw or offset on your home loan. If you have extra repayments in your home loan, using them can be cheaper than a new loan, as home loan rates are usually lower.
How to apply
Applying for a secured personal loan usually takes 15 minutes online. Most lenders give a decision within a day or two, and some within the hour.
- Check your rate first. Many lenders show the rate you'd get with a soft check, which doesn't show as a credit enquiry, before you formally apply.
- Have your details ready. Lenders ask for ID, payslips or tax returns, your spending, and the debts and credit limits you already have.
- Apply to one lender at a time. Each formal application is recorded on your credit report, and several close together can make lenders more cautious.
- Read the contract before you sign. Check the comparison rate, every fee, and what happens if you repay early or miss a repayment.
- Have the asset's details ready. For a car, that's the make, model, year, VIN and the seller's details.