When it comes to borrowing money, personal loans are a popular choice for many people. They offer a way to finance various expenses such as home renovations, a holiday, medical bills and can even be used to consolidate existing debt. If you find yourself looking to take out a personal loan, two words you might come across are ‘secured’ and ‘unsecured’ so it's important to understand the difference between the two.
What is a secured personal loan?
A secured personal loan is backed by collateral such as a vehicle, real estate, or valuable personal possession. This collateral provides assurance to the lender that in the event loan repayments are not made, they can take possession of the agreed collateral to recover the funds of the outstanding balance.
What is an unsecured personal loan?
On the other hand, an unsecured personal loan does not require collateral. Instead, approval for this type of loan is based primarily on the borrower's creditworthiness. Lenders assess factors such as credit score, income, employment history, and debt-to-income ratio to determine eligibility. Since there is no collateral involved, unsecured loans could be seen as a higher risk for lenders and may come with higher interest rates compared to secured loans.
One of the main advantages of a secured personal loan is the potential to obtain a larger loan amount due to the added security of collateral. This is particularly beneficial for major expenses such as home renovations or large purchases. Secured loans may also come with lower interest rates thanks to the reassurance of the collateral which the lender may sell in the case of the borrower defaulting on their repayments.
While the temptation of a lower rate might be enough for you put your car or any other personal possessions on the line, it's vital to be absolutely certain of your ability to repay the loan before opting for a secured option.
Unsecured personal loans, on the other hand, do not carry the same risk to personal assets and is typically a safer choice for most people. As a bonus, the application process for unsecured loans is generally faster as there is no need for collateral evaluation. That being said, an unsecured loan can be harder to qualify for if you have a lower credit score.
Learn more about creditworthiness with our article ‘What is a credit score and does everyone have one?’
Find out more about an Auswide Bank personal loan.
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Auswide Bank Ltd ABN 40 087 652 060, AFSL No. 239686, Australian credit licence 239686 is the credit issuer. Credit criteria, fees & charges and terms and conditions apply. This information provides general advice only. We do not provide advice based on any consideration of your personal objectives, needs or circumstances.
