If you are looking for a personal loan to help you take the next step towards a holiday, a new car, a used car or another large purchase, you might want to consider applying for a secured loan. Find out how to compare secured loans and and what you can use as an asset to get a lower interest rate.
A secured personal loan is a line of credit that is guaranteed against an asset you own or one you buy with the loan. You can usually apply for an amount up to $100,000 for terms up to seven years, although the line of credit can be ongoing. The security can come in the form of a number of different items, including a car; equity in your home; high-priced items such as jewellery; or monetary accounts such as term deposits.
Is a secured loan right for you?
It is important to determine whether any type of financial product is right for you before you apply. When it comes to secured personal loans, here are some points to keep in mind:
You can manage your repayments. If you find yourself unable to repay your secured loan the lender is able to repossess the asset you offered as a guarantee to cover its losses.
You have an asset to guarantee or are looking to buy one. Lenders will require you to either be looking to buy an asset with your loan (such as a car or home renovations) or you already have an asset that meets its criteria.
You meet the requirements set by the lender. Lenders will have requirements for the guaranteed asset, such as its age or value. For example, if you are using a vehicle as security, it may need to be under a certain age; or if you are using a term deposit you may need to have a certain amount in the account.
Types of secured personal loans
You have a few options when it comes to secured personal loans:
These secured loans can be for new or used cars. You can find car loans from most banks and credit unions, as well as dealerships and standalone car loan lenders.
If you are looking to renovate; invest in property; go on a holiday or buy a new car, you can consider a home equity loan. Also called a line of credit, as it can be drawn on continually based on the equity held in your property, this is a flexible way to access funds.
This is a loan offered by banks and credit unions to customers who hold term deposits with them. You are able to borrow as much as you hold in your term deposit, with the term deposit acting as the security.
High-priced assets such as boats, motorbikes and jewellery are accepted by some lenders as a guarantee. Your item or collection of items is valued and then used as security, allowing you to take out the loan you need. You generally won’t find these loans at major banks.
What assets can you secure to a personal loan?
Depending on the type of loan that you want to take out, you can generally use the following assets to secure your loan:
New car. If you are buying a new car or you have a car that is less than two years old, you can generally use it as a guarantee for a secured loan. Secured motorbike and caravan loans are also available.
Used car. Lenders may let you purchase a used car with a secured loan. Other vehicles such as motorbikes or caravans may also be allowed. The vehicle will generally need to be less than seven years old, although some lenders will accept cars up to 10 years old. Cars may need to be of a certain condition.
Equity in your home. If you own a mortgaged property, you can draw against any equity you have in the property to finance a purchase. Common uses for home equity loans are home renovations. You can find out if a home equity loan is right for you.
High-cost assets. Some lenders are more flexible with the assets they let you use. If you own expensive jewellery, fine art, precious metals, prestige cars or even certain antiques, you can secure it against your loan.
Term deposits. This is a more common type of loan available from some banks and credit unions. How much you have available in your term deposit is how much you are able to borrow with that same institution. The amount of your term deposit works as the security in case you default on the loan.
How does a personal loan work when you secure it with equity?
A loan secured against your home works in the same way as other guaranteed personal loans. When you apply, you need to provide details of your mortgage, financial position and the reason you wish to take out the credit. The loan provider will assess your application, and if you obtain approval, you receive the loan, dependent on how much equity you hold and how much the lender thinks you can afford to repay.
Working out your equity
Home equity is essentially the difference between your property’s value and the debt you hold against it. Typically, you can borrow up to 80% of your home’s value, minus the debt you hold against it. For example, if your home is worth $500,000 and you’ve paid off $300,000, you have $200,000 left on your mortgage.
Here’s how much you can borrow on a personal loan in this scenario:
80% of a $500,000 home = $400,000
The amount of debt on the property = $200,000
Value – debt = $200,000
Do you need to apply with the same lender as your mortgage?
No, you don’t. However, your lender may have secured personal loan options to consider, that allow you to use your home equity as a guarantee. If you decide to apply with a different lender, you need to provide details of your mortgage, including your total loan and how much equity you hold.
How to compare secured personal loans
Consider the following features when comparing secured loans:
Loan amounts. Find out what loan amounts the lender is offering and if it matches your loan purpose.
Loan terms. Generally, loans are available for terms of between six months and seven years. Loan terms may only extend up to five years for fixed rate loans or peer-to-peer loans, so make sure you find a loan with terms that meet your needs.
Assets you can secure to the loan. Lenders have different requirements when it comes to secured loans. You may not be able to secure the asset you are planning to, so check this before you apply.
Fees. Check upfront fees such as application or establishment fees as well as ongoing fees such as annual or monthly fees. These will add to your costs for the loan.
Interest rate. How competitive is the interest rate? Compare the rate to other lenders and make sure to check the comparison rate which will give you a better idea of the true cost of the loan.
Repayment flexibility. Are you able to repay the loan early without penalty? Can you make additional repayments without being charged? Check this before you apply.
Lower rate. These loans are less of a risk for the lender and so come with lower interest rates.
Flexible. Unlike car loans, where you have to purchase the vehicle you are securing to the loan, you can generally purchase whatever you need to with a secured personal loan as long as the amount doesn’t exceed your secured asset’s value.
Higher chance of approval. Offering an asset to secure a personal loan can help you be approved for loans you may previously have been refused. This is because the loan is deemed less risky for a lender to take on when there is an asset attached to it.
Risk to your asset. When you take out a secured loan you are “guaranteeing” your loan with it. While this gives you a lower rate, it also means you can lose the asset if you default on the loan.
Loan amount is tied to your asset’s value. When you attach your asset to a secured loan it needs to be valued. This value will then be used to determine the loan amount you are offered by the amount.
Before applying for any type of secured loan, it is important to establish whether you can afford the repayments. If you default on the loan, the asset you have used as the guarantee can be taken by the lender and sold to cover the loss.
Compare lenders to find the most competitive options in terms of terms, rates and fees, as this will help find the right option for your budget and needs. Make sure you have done a proper search before submitting your application.
Frequently asked questions about secured personal loans
A car loan is used specifically to purchase a vehicle. The loan is still secured, but the loan amount is restricted to buying the vehicle that will be used as security for the loan. A secured personal loan is where you already own an asset, such as a car or equity or in your home and then use the loan amount for a different purpose.
The lender is able to sell your asset to recoup its losses.
Because you have attached an asset to the loan, the lender is taking on less risk by lending you money. This is because even if you default on the loan they have a right to seize the asset you have attached to the loan. In exchange for you taking on the risk of attaching the asset to the loan, you receive a lower interest rate.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
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