Secured and unsecured personal loans

Secured or unsecured, in plain terms

A secured personal loan is tied to an asset — usually a car, sometimes another item of value. The lender registers an interest in that asset, and if the loan is not repaid the asset can be taken and sold to clear the debt. Because the lender is carrying less risk, secured lending is generally cheaper. The trade-off is real: you are putting something you own behind the loan.

An unsecured personal loan has no asset attached. Nothing of yours is registered as security, so there is nothing for a lender to repossess if things go wrong. That does not make the debt softer — the lender can still pursue the money owed, and the loan still appears on your credit file — it just means the recovery path is different. Because the lender has no asset to fall back on, unsecured lending usually costs more than secured lending.

Which one is right depends mostly on what you are buying. If the money is going into a vehicle, securing the loan against that vehicle is often the sensible structure, and that is car finance rather than a personal loan. If the money is going into a wedding, a holiday, legal fees or a procedure — things that do not hold resale value — there is no asset to secure it against, so unsecured is usually the only structure available.

The honest bit about a fixed term

Here is the point worth making plainly, because it is the one most often skipped. An unsecured personal loan has a fixed end date. You know the repayment, you know the number of months, and if you make the payments the balance reaches zero on a date you can put in a calendar. That is usually more disciplined than letting a credit card balance revolve, where the minimum repayment is designed to keep the debt alive rather than clear it.

But it is still debt. A fixed end date is a discipline, not a discount. Two things follow from that.

• Match the term to the reason. A loan should not outlive the thing it paid for. Borrowing over seven years for a two-week holiday means you are still paying for it long after the memory has faded. A shorter term costs more each month and less overall; a longer term does the opposite. Pick deliberately rather than by default.
• Only borrow what the purpose needs. Lenders assess what you can afford, but the amount you can borrow and the amount you should borrow are different numbers. The gap between them is where regret lives.

If a loan is meant to replace more expensive debt, the test is simple: is the total cost over the full term lower than what you are paying now, and does the new loan actually close the old accounts rather than sit alongside them? If the answer to either is no, consolidating has not helped — it has just moved things around.

If the repayments you already have are a stretch

Sometimes the reason someone is looking at a personal loan is that the current month is not working. If that is where you are, taking on another repayment may not be the answer, and we would rather say that than arrange a loan that makes next year harder.

The National Debt Helpline is a free, independent, confidential service staffed by financial counsellors. Call 1800 007 007, Monday to Friday. It is a sensible call to make early — plenty of people ring while things are still manageable, simply to get a clear picture and know what their options are.

You are also welcome to talk to us either way. We are a broker, we are paid when a loan settles, and we will tell you when the honest recommendation is not to borrow.

What we will ask for

A personal loan application is lighter than a home loan, but a lender still has to be satisfied the repayments fit your circumstances. Expect to be asked for identification, evidence of your income, and a picture of your regular expenses and existing commitments. If the loan is secured against an asset, there will be paperwork about the asset as well.

We are not the lender and we do not make the decision. What we do is match your circumstances to lenders whose policy fits, put the application together properly, and deal with the back-and-forth so you are not chasing it. If a lender declines, we will tell you what drove it.

Need help sourcing a car?

If the borrowing is really about buying a vehicle, that is usually secured car finance rather than an unsecured personal loan, and it is a different conversation. Our sister company OnlineShowroom.com.au can help with finding the car itself.