When it comes to borrowing money, you should carefully consider your options. Whether you’re thinking about a personal loan or a home loan, it’s a commitment. You will be entering into an agreement and be required to set up regular repayments to your lender. We always advocate for people to do their research upfront. What do you need the money for? How much do you need to borrow? It’s essential that you understand the interest rates you’ll pay on your repayments, any upfront fees and early repayment fees. Once you understand what you need and what you can afford, you can decide on the type of loan that suits your situation best.
As personal loan providers, we often get asked about the difference between secured and unsecured personal loans. Read on for the ultimate guide of secured and unsecured personal loans and discover what is the best option for you.
What is a personal loan?
A personal loan allows you to borrow money from a lender, such as a bank or a fintech enabled personal loan company such as Nectar. Personal loans are usually taken out for a smaller sums of money than say a mortgage. Often ranging from a minimum of $1,000 to a larger amount in the tens of thousands of dollars. Nectar, for example, has a maximum personal loan amount of $25,000.
Personal loans are taken out for a number of reasons. Some common scenarios include covering a significant one-off expense such as home improvements, a wedding or a special holiday. It can also be used to cover unexpected costs, such as a loan to fund any mechanical work on your vehicle or help you pay for any unforeseen medical expenses. Some people also choose to take out a personal loan for debt consolidation purposes. This is when you elect to have one single loan rather than manage the repayments on several smaller, potentially more expensive loans.
Personal loans can be taken out with banks or other lenders. It always pays to do your research. Look into the interest rates, establishment fees and early repayment fees. Having a broker arrange a personal loan for you can be expensive so you should carefully consider any brokerage fee. And remember, fees will vary considerably from lender to lender.
Types of personal loans
There are different types of personal loans in the market that appeal to different people. Some people may be reluctant to approach their bank for a loan if they have an outstanding loan with them. While others have heard negative stories about payday lenders and choose to not engage with them for lending.
We would always suggest that you have a clear view of why you need a loan. It’s essential to understand why you need the loan and what you can afford to repay. This will ultimately help with the decision making process. Flexibility around repayments (overpayments or early repayments) and disclosure of all fees upfront is a good sign you’re dealing with a reputable lender.
Let’s dig a little deeper into the differences between a secured and unsecured personal loan.
Secured personal loans
A secured personal loan means that your loan is secured with an asset or collateral that you own. Common examples of secured loans include a mortgage or home loan where your house is the security or available asset for the lender. A motor vehicle loan is another example of lending being secured against an asset.
A secured personal loan provides your lender with protection. If, for some reason, you are unable to make the repayments, they can sell your asset or collateral to recoup their lending. For example, if you cannot meet your mortgage repayments, your lender can sell your home.
The benefit of taking out a secured personal loan is that you can borrow larger amounts of money. The lender can allow you to borrow significant amounts of money as they won’t be out of pocket if you can’t meet your repayment obligations.
Unsecured personal loans
Unsecured loans don’t require you to put down any collateral. Essentially this means
if you cannot meet your personal loan repayments, your lender cannot take any of your assets but initiate a debt collection process.
Typically, unsecured personal loans are for smaller loan values, as these are lower risk loans for lenders.
Unsecured loans are generally quicker to arrange and have lower fees than secured loans., with higher interest rates. We always advocate looking at the total amount payable on a loan as this includes all interest and fees and give a better indication of the cost of borrowing than just looking at interest costs alone.
Other loan types
A fixed-rate loan is a common type of home loan or mortgage. Fixed-rate loans have a specific interest rate for an agreed period of time. Borrowers know precisely what their repayment obligations are for fixed-rate loans. At the end of the fixed-rate loan term, you have the opportunity to fix your loan again or opt for a more flexible variable or floating rate loan.
There is security in understanding your regular repayment amounts. However, these loans aren’t usually very flexible in terms of making additional repayments. This can be difficult when you want to pay off your loan quicker, without incurring extra charges. You also risk paying more interest if floating interest rates were to drop during the fixed-rate term of your loan. Break fees can also apply if you sell your home and need to ‘break’ the terms of your loan.
Payday lenders or loan shops are those local loan providers or online payday lenders who provide quick cash at a high cost. Their model is built around targeting people who need financial support, fast. They often have the highest interest rates in the market so it is important to understand the overall cost of taking out a loan with these lenders, rather than just understanding the weekly repayments. They’re known as payday lenders as they ensure they prioritise your repayments by timing them for your payday.
Who should consider a personal loan?
Sometimes life throws you a curveball, and you need a little helping hand. A personal loan is an ideal solution in these scenarios: enabling you to upgrade your washing machine the day after your current one breaks or turn your budget wedding into your dream wedding.
Although some people may already have a credit card, a personal loan can be a better solution. You won’t need to go through the trouble of asking your bank for additional credit. And personal loans can also offer a better interest rate than a credit card interest rate.
What is the right personal loan for you?
Understand what you want to use your loan for
An unsecured loan is suited to situations where you might want to borrow a smaller sum of money, or quickly arrange finance. Unsecured loans also suit people with good credit histories and lenders usually require security when making personal loans to borrowers who have had issues in the past. Personal loans are typically used for emergencies, car finance, holidays or weddings. If you want to buy a house, you’ll want to research home loan rates rather than small scale personal loans.
Understand your credit score
Having a good credit score will enable you to have more options in both the choice of loans and the rates offered. This holds true for both secured and unsecured loans. Your finance application will often take your credit score into account. Your credit score contains information about your previous approved credit applications. It will look into your financial history to find if you have paid your debt off under the terms of your credit agreement, and whether your current loans are up to date. Lenders can access your credit score information to assess your creditworthiness whenever you apply for finance. Consider what steps you’ll take to keep your credit score in good shape.
Information is publicly available about how credit scores work – these types of guides also explain how you can take steps to improve your credit score.
Think about how much you need to borrow
An unsecured loan might be for you if you need to top up a savings account for a significant life event. Perfect if you’re looking to fund your dream wedding or some home improvements. Check out how much you can borrow with Nectar.
A secured loan might be more suitable for you for more significant sums, like purchasing a new car. Remember, lenders are likely to lend you more if you provide collateral for the loan, giving them security.
Consider your repayment period
Are you looking for more of a short term loan? You’ll likely want an unsecured loan. With a quick application process and money hitting your bank account the same or the next day, you can be reasonably flexible with the loan amount and repayment option that suits you.
A shorter-term loan means you’ll pay your loan back faster, and you’ll typically pay less interest than on a longer-term loan.
Borrowing a more significant amount of money usually has a longer repayment period. Therefore you will pay more interest over the term of the loan than a shorter-term loan.
Getting started with Nectar
Need a great rate on a personal loan? We’d love to help with your personal loan requirements. Check out how much you could borrow and learn more about our personal loans. You can get started with Nectar and receive a personalised loan quote including your interest rate and the amount you can borrow. Borrow better, faster today!*
*Nectar’s lending criteria and responsible lending checks apply.