Secured Loans versus Unsecured Loans

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It’s a battle of two personal loan lending titans… The secured loan versus the unsecured loan… let’s get the tale of the tape.

If you need to look at borrowing money then you have a few decisions to make.  One of those decisions will be whether you borrow through a secured loan or an unsecured loan... but actually, what is the difference between these two loan types?  Well read on finance bunny and let’s go down the rabbit hole of explaining personal loans and some tips about choosing a secured loan versus an unsecured loan.

 

What is a Secured Loan?

A secured loan is a type of personal loan that is connected to a piece of collateral.  This is usually something with a significant value like a car or a home which can then act as a ‘guarantee’ that the loan will be repaid.  When you borrow money via a secured loan, the bank or lender is granted the power to take possession of the collateral (i.e. your car or home) if you get into a situation where you are unable to repay the loan in accordance with your personal loan agreement.  

This may sound weird but actually some very common loans are secured loans, people just don’t realise.  For example a car finance loan or a mortgage.  These are both types of secured loans and pretty common.

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What is an unsecured loan?

As you can probably imagine after reading the description above, an unsecured loan is NOT protected by any collateral or guarantee.  In the case of an unsecured loan the penalties are very different if you get into an unfortunate situation where you default on the loan you have taken.  In the case of an unsecured loan the lender can't automatically take your property, car or other collateral.  They simply can chase you for the money through more traditional means of Debt Collection Agencies like Baycorp.  The most common types of unsecured loan are things like credit cards, student loans, and unsecured personal loans.  There is a lot of trust with these types of loans and your credit rating is of greater importance as there is less recompense should you default.

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Choosing a secured or unsecured loan

There are a few simple factors to consider when deciding on a secured vs. unsecured loan.  First off, a secured loan is normally easier to get, as, as described in the previous paragraphs, there's significantly less risk to the bank or lender.  If you have a poor credit history or you’re trying to rebuild your credit rating, banks and lenders will be more likely to offer you a secured loan versus an unsecured loan.  This is because they have more security of you paying your bills.

As a second general rule, the secured loan will usually have lower interest rates than an unsecured loan.   What does that actually mean?  Well put simply it means a secured loan will cost you less money to borrow so if you can qualify for one, it usually makes financial sense to take on a secured loan rather than an unsecured loan.  A secured loan will also offer significantly higher borrowing limits (as the risk is reduced), enabling you to gain access to more money and the bank to have less risk.  Perfect!

 

Need help applying for a loan?

Finance can be a very confusing area of life admin and so if you’re one of those people that look at APR’s, LTV’s and percentage repayment and feels your head start to throb then fret not!  We can help.

Click here to request a call from one of our friendly finance partners.

 

Final point!  Loans are just that…. A LOAN.  No one is giving you loads of free money (unfortunately)…. You do have to pay it back… however, how, when and what you borrow can impact the amount of interest and cost of fees that you end up paying.  If you need to borrow more money and you already have loans or credit card debt or you're having trouble paying your current bills then consider a debt consolidation loan.

Better still… in a perfect world you should try and SAVE for the things you need rather than BORROW to buy them.

Hope this helps!

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