Secured vs Unsecured Loans — What’s the Difference & Which is Better?
Secured Loans vs Unsecured Loans, what actually is the difference? If you’ve been wondering this, you’re not alone. Use this blog to cut through the confusion and find out everything you need to know quickly. We’ve broken down everything you need to know about the difference between secured loans and unsecured loans, plus how to choose the right option for you.
Overview:
- What’s the difference between secured vs unsecured loans
- Advantages and disadvantages of secured and unsecured loans
- How to tell if your loan is secured or unsecured
- Difference between secured vs unsecured loan interest rates
- Is a secured or unsecured loan better?
- Secured vs unsecured loan facts
- FAQs for secured vs unsecured loans
What’s the difference between secured vs unsecured loans?
Secured loans use an asset, like a car, as collateral for the loan whereas unsecured loans are based entirely on your creditworthiness. The collateral on secured loans acts as insurance for the lender and means they can offer easier approval and lower interest rates compared with unsecured loans.
What is the security of a loan?
Security for a loan, often referred to as collateral, is an asset promised by the borrower to protect the lender in the event that they don’t fulfil their loan obligations. It ensures that if the borrower fails to repay the loan, the lender can seize the asset to recover the outstanding amount.
Some examples of loan security are:
- Real estate
- Vehicles
- Equipment and machinery
- Jewellery and valuables
- Recreational vehicles
Examples of common secured vs unsecured loans
The following are some common examples of the types of secured and unsecured loans you can get:
Advantages and disadvantages of secured and unsecured loans
It’s important to weigh up the pros and cons of secured vs unsecured loans before you decide which loan to apply for. Make sure you get the best one for you.
Advantage of secured loans
Advantages to getting a secured loan:
- Allows you to access cash quickly—sometimes even on the same day that you apply for a loan. This can be an invaluable asset when time is of the essence, for example, if you have an emergency medical bill pop up.
- Using an asset as security for the loan usually means you can get lower interest rates than unsecured loans.
- You can often borrow larger amounts with secured loans vs unsecured loans.
Disadvantages of secured loans
Disadvantages to getting a secured loan:
- The asset you use as security can be seized by the lender if you fail to meet your repayment obligations.
- If you default on your loan it will negatively affect your credit score. This is why it’s important that responsible lenders assess if you are able to repay the loan before they approve your application.
- Typically involves a longer approval process compared to unsecured loans.
Advantages of unsecured loans
Advantages of getting an unsecured loan:
- You won’t need to use any of your physical assets as security for the loan.
- It can be a fast approval process as the lender does not need to evaluate the value of your asset.
- Unsecured loans tend to offer more flexibility around repayments.
- If you successfully pay off your unsecured debt it will help build a good credit history—making you more trustworthy and desirable in future financial situations.
Disadvantages of unsecured loans
Disadvantages of getting an unsecured loan:
- As mentioned above, more risk is involved for the lender, which usually means higher interest rates for you.
- The risk involved means it’s generally harder to get approved for a loan.
- Usually, you won’t be able to borrow as large amounts of money as you could with a secured loan.
- You’ll find lenders unlikely to approve your loan if your financial situation isn’t great and you don’t have a good cash flow and credit score.
- Your credit score will be negatively affected if you default on your loan.
How to tell if your loan is secured or unsecured
You have a secured loan if it involves collateral, like a loan against your car. If your loan does not involve collateral and relies only on your agreement to pay back the loan (plus interest and any additional fees) then it is an unsecured loan.
Difference between secured vs unsecured interest rates and fees
Your loan will have different terms and interest rates depending on several factors, including what lender you choose to go with. Whether or your loan is secured or unsecured is also a big factor in calculating the interest rates on your loan.
Do secured loans or unsecured loans have higher interest rates?
Unsecured loans typically have higher interest rates because they involve more risk for the lender. If you miss payments and default on an unsecured loan there is no asset that the lender can repossess to recuperate their lost finances. But even though they won’t be able to take any of your assets, like your car, you are still financially liable.
How compensation for a defaulted loan impacts interest rates: secured vs unsecured loans
For unsecured loans, the lender will need to take legal action to seek compensation, which could end up costing you more in the end. Because, if the judge sides with the lender you will also need to cover the cost of their legal fees.
It’s a more straightforward process of compensation for the lender when there is an asset listed as security on a loan. That’s why Secured Loans tend to have lower interest rates.
What is better, a secured or unsecured loan?
Which loan type is better for you will depend on your particular circumstances. Because secured loans generally have lower interest rates, they are a great option. On the other hand, an unsecured loan may be the best choice if you don’t have any assets or don’t want to place them at risk.
Is it better to have secured or unsecured debt?
If you default on a secured loan the lender can repossess the assets/s you listed as security on the loan, often a car or house. Also, if the asset does not fully cover the cost of your debt, the lender may decide to also take legal action, if they decide it’s worth it.
But with unsecured debt, the only way for a creditor to recuperate their lost funds is through legal action. Often you’ll have to pay more than the original amount (if the court sides with the lender) as you will have to cover the cost of their legal fees as well.
Secured vs unsecured loan facts
- Secured loans require some type of asset as security for the loan, unsecured loans do not.
- It is generally easier to get a secured loan than an unsecured loan, as there is less risk involved for the lender.
- Failing to repay your loan will negatively affect your credit score, whether you have a secured or unsecured loan.
- Thankfully, ‘debtor’s prison’ is no longer a thing (at least in Australia). So you cannot go to jail for not paying either an unsecured loan or a secured loan.
FAQs for secured vs unsecured loans
Are credit cards secured or unsecured loans?
In Australia, all credit cards are unsecured loans. Secured credit cards are available in some countries, including the United States of America. But they are not currently available in Australia.
Secured vs unsecured loan credit score: will a secured loan affect my credit score?
A secured loan will affect your credit score in the same way as an unsecured loan. If you fail to make repayments and default on your loan your credit score will be negatively affected.
Secured vs unsecured car loan, which should I get?
Most auto or car loans are secured loans. In some cases, you could get an unsecured car loan. But people tend to apply for secured car loans because they are generally easier to get, offer larger sums of money, and lower interest rates.