Whether it’s for home renovations, a holiday, or even an expensive trip to the dentist, a personal loan can be handy when you need a quick cash burst, as long as it’s the right one for your needs. One key consideration is whether to go for a secured or unsecured personal loan.
- What is a secured personal loan?
- Pros and cons of secured personal loans
- Secured vs unsecured personal loans
- Fixed vs variable 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 property, 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 prefer 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 knowing that you will repay your loan and, if not, with the backing of a security to fall back on should you be unable to meet repayments.
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
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Lower interest rates: Secured personal loans often have lower interest rates than unsecured loans because there is less risk of loss for the lender
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Potential to borrow larger amount: You can generally borrow more with a secured personal loan
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Fewer fees: You may also find that secured personal loans have fewer or no fees when compared to unsecured personal loans
Cons
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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
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Must meet 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
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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, consider the differences between secured personal loans and unsecured personal loans.
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Secured personal loans |
Unsecured personal loans |
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From this brief comparison, you may find that secured personal loans are better suited to large, one-off purchases. By knowing exactly how much the goods or services cost, you won’t be left with too much or too little leftover. On the other hand, an unsecured personal loan may be better for a smaller expense, like an overseas holiday. This way, if there’s any money leftover after you’ve funded your personal endeavour, you can just spend the remainder on something else, or start paying back the loan.
Fixed vs variable interest rates
Secured personal loans will typically offer two interest rate options - fixed or variable interest rates.
Fixed rates are typically higher than variable rates, but once you have your rate, it will remain the same throughout the duration of your loan. This means you know exactly how much your repayments will be each month, as well as 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 a number of factors - particularly the cash rate and associated market activity. While it may end up being lower than a fixed rate to begin with, if interest rates rise, you could end up paying more. If interest rates fall, you will pay even less than the rate you started with. Being variable, the interest rate 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.