You may need a personal loan for a number of reasons. Whether it’s for home renovations or an expensive trip to the dentist, taking out a personal loan can come in handy when you need a quick cash burst. You will usually be given two options when it comes to personal loans: secured or unsecured.
Let’s discuss what a secured personal loan is, the pros and cons, costs, and more.
- What is a secured personal loan?
- Pros and cons of secured personal loans
- Secured vs unsecured personal loans
- Secured personal loan rates
What is a secured personal loan?
A personal loan is, in essence, a loan for personal reasons. While a car loan must be used to buy a car, a personal loan can be used for anything from paying for an overseas holiday to a home makeover.
A secured personal loan requires you to use an asset, such as your car or a term deposit, as security on the loan. This acts as a security blanket for the lender so, in the case you were unable to repay your loan, they have your asset to fall back on to make up for any losses. Typically, you’ll need to take out a secured personal loan if you’re looking to borrow a large sum of money, as lenders like to have this security backing them.
Secured personal loans can also come with lower interest rates than unsecured loans because of the added security. With this in mind, the lender can have more confidence that you will repay your loan and, if not, that they won’t be majorly out of pocket.
Pros and cons of secured personal loans
There are a number of pros and cons that should be considered when weighing up whether to take out a secured personal loan.
Pros
- Often lower interest rate: Secured personal loans often have lower interest rates than unsecured loans because there is less risk of loss for the lender
- You can borrow more: You can generally borrow more with a secured personal loan
- Fewer fees: You may also find that secured personal loans have fewer or no fees when compared to unsecured personal loans
Cons
- Your asset is on the line: The biggest obvious con about secured personal loans is that you could stand to lose your asset if you cannot meet your repayments
- Asset requirements: Depending on what you want to use as your collateral, there may be certain requirements from your lender. For example, if you are using a car as collateral, it may need to be relatively new or worth a certain amount of money
- Less flexibility: Secured personal loans are generally pretty strict about what you use the funds for. For example, if you took out the loan for home renovations, but they ended up costing less than you thought, you can’t just use the remainder to treat yourself to a holiday.
Secured vs unsecured personal loans
Before you decide whether a secured personal loan is right for you, it might be helpful to compare the pair: secured and unsecured personal loans. Given these will be your two main options, it can be helpful to know the differences and which may be most helpful for your situation.
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From this brief comparison, you may find that secured personal loans are better suited for large, one-off purchases - like installing a back deck or the costs of a cosmetic surgery. By knowing exactly how much the goods or services cost, you won’t be left with too much or too little leftover.
Whereas an unsecured personal loan may be better for a smaller project, like a quick kitchen makeover or an overseas holiday. This way, if there’s any money leftover after you’ve funded your personal endeavour, you can just spend it on whatever you’d like.
Secured personal loan rates: Fixed vs Variable
More on secured personal loans and their ‘lower’ rates, you will usually be given two interest rate options: a fixed rate or a variable rate.
Fixed rates are generally a bit higher than variable rates, but once you have your rate, it will remain the same throughout the duration of your loan. Meaning you know exactly how much your repayments will be each month, and how much interest you will pay back overall. This can be helpful for budgeting and planning reasons.
On the other hand, variable rates will usually be slightly lower than the fixed rates available. However, variable rates may change throughout the life of your loan depending on the cash rate/market activity. So while it may end up being lower than a fixed rate to begin with, if interest rates hike, you could end up paying more. But if interest rates fall, you will pay even less than the rate you started with. It can be a little less predictable than a fixed rate personal loan, as you don’t know exactly how much you will repay in interest.
