If you’re looking to purchase an asset, or you already have one, you have probably come across the terms “unsecured” and “secured” as you explore your loan options. We break down the differences in the guide below.
Secured vs. unsecured loans
If you default on a secured personal loan, the lender can repossess the asset and sell it to recoup its losses. The asset is usually one you are purchasing with the funds you are borrowing from the lender — like a car or home — but it can also be an asset you already own. If you default on an unsecured loan, the lender has to sue you in order to get back the money that’s owed.
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What kind of assets can be used as security?
Lenders are willing to use all kind of assets that hold value as guarantees for loans. Whether you are 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 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 and other items as security for loans.
- Cash or savings accounts. Banks and credit unions may allow you to use your cash, CD, savings or share account as collateral.
What type of loan is better for you?
If you’re unsure what type of personal loan you should be applying for, here are some considerations to keep in mind:
- If you’re buying a vehicle. The age, cost and type of vehicle will have a bearing on whether you can or should get a secured personal loan, or whether an unsecured loan will be a better option for you. Some lenders will only accept new vehicles (generally less than two years old) as a guarantee. If you want to purchase an older car using a secured car loan, it may need to pass a vehicle inspection check and still need to be under a certain age, usually seven years.
- 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 are 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.
How you can compare secured and unsecured 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 main points of comparison:
- Maximum loan amounts. Since secured personal loans have less risk involved, you can normally find higher loan amounts offered than with a standard unsecured personal loan.
- Interest rates. As 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. Expect establishment fees for both types of loans, although you can find lenders that don’t charge any fees to set up the loan. Some loans come with monthly fees, but these are not standard, so make sure to compare so you know your loan is competitive.
- 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. Compare lenders to find the most competitive option.
- Loan terms. For both secured and unsecured loans, you will generally find terms of between one and five years for fixed-rate loans and one and seven years for variable-rate loans.
- 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.
Credit reporting for secured and unsecured personal loans
For both secured and unsecured personal loans, lenders will report your payment history to the three major credit bureaus: Equifax, Experian and TransUnion. Any late payments or defaults will be listed on your credit report for 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.
What to consider before you apply
- Will you be able to afford the repayments? If you’re opting for a secured personal loan, the lender will be able to repossess your asset if you can’t afford the repayments. If you are considering an unsecured personal loan, keep in mind the interest rate is likely to be higher and so your ongoing repayments will be more costly.
- 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.