Secured vs. unsecured loans
The main difference between these two types of personal loans is that with a secured loan, you have to provide an asset as collateral to back the loan. This usually results in more favourable terms and rates because the lender has some guarantee of repayment if you can’t payback your loan. They’ll simply seize and sell the asset you provided to recoup their loss. Whereas with an unsecured loan no asset is required to back the loan. There is less security for the lender so this usually makes for higher rates and fees. The upside for you (the borrower) is that you don’t risk losing your car or home (or any other asset) if you can’t make your repayments.
What kind of assets can be used to back a secured loan?
Whether you’re looking to purchase one of the following items or already own one, you might be able to use it as security for a loan:
- Vehicles. This includes new and used cars, refinancing existing auto loans, motorcycles, boats, RVs and even jet skis.
- Property. If you own a property outright or hold equity in a mortgaged property, you can use it as security for a loan.
- Term deposits. If you hold a term deposit account with a lender, they may be willing to use the amount as a guarantee for a loan.
- High-cost assets. Some lenders will accept high-cost jewelry, fine art, antiques and other items as security for loans.
If you’re unsure if an unsecured or a secured personal loan is better for you, here are some considerations to keep in mind:
- If you’re buying a vehicle. The age, cost and type of vehicle will have an impact on whether you can or should get a secured car loan, or whether an unsecured loan will be a better option for you. Some lenders will only accept newer vehicles as a guarantee, while other lenders may require the vehicle to pass an inspection check.
- If you want to use the loan amount for various purposes. Lenders offering secured loans tend to place restrictions on the use of the loan amount. For instance, if you’re taking out a secured car loan but also want to buy some furniture, the lender may not let you borrow more than the cost of the car.
- If you aren’t looking to purchase an asset. You will need to already own the asset you want to use as security. While this is a less common form of secured personal loan, it is an option offered by some lenders.
Compare unsecured personal loans
Compare secured personal loans
While both types of loans are a viable way for you to finance a new purchase, you can find the option that better suits your needs by comparing them to one another. Here are some factors to consider:
- Maximum loan amounts. Secured personal loans have less risk involved since you’re providing collateral, so you can normally borrow higher loan amounts than with an unsecured personal loan.
- Interest rates. Since secured personal loans are less risky for lenders, they tend to come with lower interest rates. You can find fixed and variable rates for both secured and unsecured loans.
- Fees. You won’t find a great difference in fees between the two loan types. Some fees can be avoided, while you may be able to negotiate others.
- Credit requirements. Typically, lenders of secured loans are more lenient when it comes to credit requirements than those of unsecured loans.
- Flexibility of repayments. The difference lies in whether the loan is fixed or variable. If you apply for a fixed-rate loan, you are more likely to find penalties for extra repayments and repaying your loan early. Variable rate loans are less likely to have these penalties.
- Loan terms. For both secured and unsecured loans, you will generally find terms of between one and seven years.
- How you can use the funds. If you apply for an unsecured loan, you can generally use the funds for whatever purpose you want. Secured loans tend to come with more restrictions. For instance, if you’re taking out the loan to pay for a car, the lender may require you to use the entire loan amount to pay for the cost of the vehicle.
For both secured and unsecured personal loans, lenders will likely report your payment history to the two major credit bureaus: Equifax and TransUnion.
- Any late payments or defaults will be listed on your credit report for up to seven years from the date of the original missed payment.
- If the collateral you had tied to a secured loan goes into foreclosure or is repossessed, you may get even more negative marks added to your credit report.
- Will you be able to afford the repayments? If you’re opting for a secured personal loan, the lender will be able to seize your collateral if you can’t afford the repayments. If you’re considering an unsecured personal loan, keep in mind the interest rate is likely to be higher, so your repayments will be more costly each month.
- How much flexibility do you want with your loan amount? If you want to use your loan to make a large purchase as well as buy a number of other items, check whether this is allowed by your secured loan lender. If you can’t find a secured loan that allows for this, you may need to apply for an unsecured personal loan.
- Do you want a fixed- or variable-rate loan? Depending on the type of loan you want to take out, you may find more fixed- or more variable-rate loan options. For instance, if you’re considering a secured car loan, you may find more fixed-rate loans than variable-rate loans. It’s important to compare all available options before you apply.