So, what is an unsecured loan?
Unsecured loans are provided by a lender (like NOW Finance) to a borrower, without an asset used as collateral to protect the borrower against missed repayments or defaults. If a repayment is missed or the loan goes into default, the lender has limited recourse to recover the amount owing. This increases the risk to the lender, who will often charge a higher interest rate and limit the maximum loan amount to offset this risk.
And a secured loan?
Unlike an unsecured loan, for a secured loan an asset is used as collateral to secure the loan, giving the lender the ability to seize and sell the asset as a means of repaying the loan if necessary. As this lessens the risk to the lender, secured loans generally have a lower interest rate and can be used for loans of greater amounts. For example, at NOW Finance, with our unsecured loan, the most a customer can borrow is $50,000, however, with our secured loan customers can borrow up to $100,000.
What are the main differences between secured and unsecured loans?
Secured and unsecured loans differ in more than just how they are defined. Two key factors set them apart.
- First, secured loans require an asset as collateral, such as a car or property. If you fail to repay the loan, the lender can claim that asset. Unsecured loans do not require collateral, so the lender relies on your credit history and ability to repay.
- Second, the risk to the lender changes the loan terms. Because secured loans reduce the lender’s risk, they often come with lower interest rates and higher borrowing limits. Unsecured loans usually have higher rates and lower limits.
These factors mean that if you apply for a secured loan, you may be able to borrow more and pay a lower interest rate.
Is a secured loan different to a car loan?
Yes, a secured loan can be used for a variety of loan purposes, including the purchase of a car. However, a car loan can only be used to buy a car and depending on the specific lender, may come with other limitations such as the age of the vehicle and a balloon payment at the end of the arrangement.
One of the benefits of using a secured loan to buy a car is that you can spend your secured loan on other things too. So, if you’re looking for a car but it’s time for a holiday or getting around to planning some much-needed home improvements, you can take out a bigger loan and take care of these needs at the same time.
What else should I consider?
On the face of it, it might seem like taking out a secured loan rather than an unsecured loan is an easy decision. You can borrow more at a lower rate of interest. However, the big consideration you need to make is whether you could afford to lose the car in the event of not keeping up with repayments on the loan.
Taking out a secured loan may be cheaper and a more attractive deal, but what would happen if you couldn’t keep up with repayments and were to lose the car? If you rely on your car to get to work or for other aspects of your life, you could lose a lot more than just the car.
Which option is best for you?
Consider your circumstances and all the points we’ve looked at in this guide before deciding whether a secured or unsecured loan is best for you.
If you decide to go ahead, NOW Finance also offers joint personal loans that you and your partner can co-apply for, which may also help you with your borrowing capacity and get the funds you need for your next big move.
