When on a hunt for a personal, car, or leisure loan, you may find yourself choosing between a secured and unsecured loan. Your final decision is important. It affects many things, including the interest rate that will be given to you, the amount you are allowed to borrow, and fees to pay.
So, which type of loan is suitable for your situation? Let us break it down.
What is a Secured Loan?
If you have assets, such as a house or car, you may be able to apply for a secured loan. Several lenders are more willing to provide you with loan products if you go for this type of loan. One example is a car loan, which allows you to purchase a new or second-hand car. However, before you can apply and get approved, you should first provide collateral.
Collateral acts as a security for the lender. And that is why it is called a secured loan. You put up your goods as security or collateral.
It appears to be risky, especially compared to unsecured loans. If you do not pay your loan on time, you run the risk of losing the collateral. For most people, their collateral is their home. Therefore, if you are not a good payer, you could end up homeless.
So, why would you pick a secured loan in the first place? Here are the benefits of opting for a secured loan:
- You can enjoy lower interest rates. The interest you will pay on top of the borrowed funds will depend on the lender. Secured interest rates can be as low as six to 15 per cent. On average, car loans are around seven to eight per cent and nine to 10 per cent for nonspecific car loans.
- The fees are lower, too. Fees, such as finance and origination charges, can add to your total balance. If you have assets, you can reduce the amount you will pay when borrowing money.
- Secured loans are easier to get. Do you need a loan immediately? You can cut the waiting time by securing the loan. Lenders find you less risky than those who opt for unsecured loans. Therefore, you have a big chance of getting approved quickly.
- You can apply for a secured loan even if you have a poor credit history. If you are currently rebuilding your credit, it is tough to find a lender that is willing to accept your application. However, if you offer collateral, such as your home or car, your credit background may be disregarded.
- You can borrow a considerable amount. Compared to an unsecured loan, you can borrow money to purchase a car, leisure vehicles, or any other personal expenses.
It is important to remember that the lender has the right to seize the property or any asset you have named as collateral.
What is an Unsecured Loan?
If you are scared of losing your home, car, or any asset, you can turn to an unsecured loan. As the name suggests, it does not require any form of security. In other words, you do not need to provide any asset as your collateral.
The problem with an unsecured loan is that lenders are reluctant to approve applications, especially if you are a new customer. However, if you have recently borrowed from the group and you paid your previous loan on time, you could get the funds quickly. Unsecured personal loans are ideal for home renovations, covering an outstanding utility or medical bill, or other personal expenses.
The main reason why several Australians opt for unsecured loans is that they do not want to worry about the dangers associated with a secured loan. Since unsecured loans do not ask for a property to be named to secure the borrowed amount, they can solely focus on paying off the loan.
However, be wary of the risks involved with an unsecured loan, which include:
- Higher Interest Rates: Because unsecured loans do not provide some form of security for the lenders, they charge a higher interest rate. Above, we have mentioned that the lowest average interest rate for a secured loan is six per cent. For an unsecured loan, you could be looking at an interest rate of 10.75% or higher, depending on your credit standing.
- Lower Loan Amounts: You will usually be offered with a low loan amount compared to secured loans.
- Credit Requirement: It is difficult to get approved for an unsecured loan, except if you have an outstanding credit history.
Perhaps the biggest benefit of an unsecured loan is that there is no chance of losing a significant asset on the side of the borrower.
Which One Should You Pick?
The decision between a secured and unsecured loan depends on your own situation. Here is a rough guide in making your final choice:
- Do you need a huge amount? If you are looking to purchase a brand new vehicle, go on a lavish holiday, pay for your upcoming wedding, or renovate your home, a secured loan is the better choice. If you only need a small amount to add to your budget when buying a car or other personal expenses, an unsecured loan may be suitable.
- Are you worried about the high-interest rates? Then choose a secured loan. You have to offer an asset, such as an existing vehicle, your own property, high-cost jewellery, or fine art, to get approved. If you are not too concerned with the high-interest rate, you can simply choose an unsecured loan.
- Do you have a bad credit history? You will find that lenders of secured loans are more lenient. They do have credit requirements but are often willing to forgive you for your lapses and still provide you with a loan. On the other hand, if you cannot give an asset as collateral, it is difficult to land a loan.
- How long are you willing to pay for the funds you borrowed? Loan terms vary depending on the type of loan you are going for. Secured and unsecured loans both possess interest rates. You should look at whether they are fixed-rate or variable-rate, which dictate the duration of the loan term. Most of the time, a fixed-rate loan (whether it is a secured or unsecured loan) can be from one to five years. Meanwhile, a variable rate loan can range from one to seven years.
- How do you plan to use the funds? Many lenders do not restrict their borrowers when it comes to the purpose of the loan. However, they do require you to state what you will use the funds for. Unsecured loans are less prohibitive so that you can use the money for whatever reason. On the other hand, there are several lenders with restrictions on secured loans. Because the amount they can offer is more significant, you may only be able to use the money for a specific purpose. For instance, if you will take out a loan to buy a car, your lender may require you to pay for the entire cost of the vehicle using the borrowed funds.
Another question that you may be asking is whether your payment history will be reported. Regardless of the type of loan you choose, lenders will report your payment behaviour to the three credit bureaus, which are Equifax, illion, and Experian. You are allowed to access your credit report by contacting these agencies.
Although you risk losing an asset with a secured loan, you should always be able to afford the repayments even with an unsecured loan. Any late payments and defaults will immediately be in your credit report. You cannot remove this information for the next seven years.
If you keep missing payments, you will have to give up the collateral. If it is listed as foreclosed or repossessed, it will appear in your credit report, which means more negative marks. It reduces your chances of getting approved of a loan in the future.
To find the best solution to you, talk to the experts. At Loans Unlimited, we can help find the best loan for your finances.