Secured vs Unsecured personal loans
- Secured loans are guaranteed by an asset that the lender can take possession of if you don’t make agreed repayments.
- Unsecured loans aren’t guaranteed by an asset but instead may have higher interest rates.
Personal loans can be an important part of any financial journey, being there to help us with planned purchases, life events and consolidating debt into one payment.
You may have come across the terms ‘secured loans’ and ‘unsecured loans’ when looking into personal loans, but what exactly do these different loan types mean?
Enjoy yourself a cuppa as we look into secured vs unsecured loans, their unique advantages, things you might need to think about and how to apply for a personal loan.
Understanding secured vs unsecured loans
When you take out any type of personal loan, you’re receiving money upfront in return for promising to repay the money, along with any interest and fees applicable.
These loans can be used for a wide range of reasons, from buying a car, paying for a wedding, funding home renovations and more.
Personal loans come in secured and unsecured types.
And while both loans result in you receiving funds, there’s one big difference between them that can impact how you choose which one is best for you — asset security.
What are secured and unsecured loans?
Secured loans
When you get a secured loan, it means the loan is guaranteed by an asset. The lender (that’s who’s providing the loan) uses this asset as ‘security’ for the loan.
For example, if you get a secured personal loan to buy that snazzy new Electric Vehicle (EV) you’ve had your eye on, the EV becomes the loan’s security.
The lender can take possession of the EV in the event of agreed repayments not being made and the loan defaulting. The lender can then sell the EV to recover the loan amount. This loan type is also known as ‘secured debt’.
Unsecured loans
For an unsecured loan, there’s no such asset guarantee.
The loan is called unsecured because there’s no asset tied to the loan. You’ll still need to make repayments, but there’s no asset the lender can possess.
This loan type is also known as, yep you guessed it, ‘unsecured debt’.
Just keep in mind because of the lack of asset security needed, that also generally means a higher interest rate compared to a secured loan. We’ll get into more details below.
Advantages and things that you might need to think about
Advantages of secured loans
- Because your loan is guaranteed by an asset, a secured loan is seen by the lender as less risky to provide. This means you could receive a lower interest rate compared to an unsecured loan.
- You may be able to borrow larger sums over longer terms compared to unsecured loans (again, this is because the lender knows if the loan defaults, they can sell the asset to recover their money).
- You may be able to access a secured loan with a lower credit score when compared to an unsecured loan.
Things to think about with secured loans
- You could lose your asset if you’re unable to repay the loan.
- It may take longer for your secured loan to be approved than an unsecured loan due to the paperwork and time involved with evaluating your asset.
Advantages of unsecured loans
- No asset required. Provided you’re approved, the loan’s provided for you to use to meet your requirements and objectives.
- Unsecured loans are flexible for your needs. You may choose to borrow a lump sum and use parts of it to repair your car, pay off your credit card and renovate your home. Once the loan’s approved, the money’s yours to use.
Things to think about with unsecured loans
- Because there’s no asset tied to the loan, an unsecured loan may be riskier for lenders and this is typically reflected in higher interest rates.
Which loan option is right for me?
In the end, nobody knows your financial circumstances and goals better than you. By knowing the differences between secured and unsecured loans, you will have a better understanding of the available options.
How to apply for a personal loan
A personal loan from ING is an unsecured loan with a competitive personalised fixed interest rate and no early repayment fees. A fixed rate means you will have the benefit of fixed and predictable repayments for the life of the loan, while still having the flexibility to pay off your loan early, with no additional fees or costs for doing so. And if you’re an existing ING customer, you could get your personal loan funds on the same day that you accept your loan offer. How good!
Apply here
Secured and unsecured loans FAQs
Can I combine secured and unsecured loans?
You may choose to take out a personal loan and use the funds to pay off existing secured and unsecured loans. This then leaves you with one loan repayment to focus on. This process is called debt consolidation, which you can learn more about here.
Do unsecured loans impact your credit score?
Each time you apply for an unsecured loan, the lender needs to access your credit report, which could temporarily lower it depending upon a range of factors such as the number and frequency of credit applications you’ve made, the type of account you’ve applied for, the lender you’ve chosen and the size of your credit enquiry. Missing repayments and not repaying a loan will impact your credit score.
However, by keeping up with repayments, you help keep your credit score in shape.
What’s an example of a secured loan?
A mortgage is a secured loan because the property involved becomes the loan’s security. If the mortgage defaults, the lender can sell the property to recover the funds provided.
What are examples of an unsecured loan?
An unsecured loan can be used on whatever you deem fit, once you’ve received the funds. Common ways people use unsecured loans for include: