If you are considering taking out a personal loan, it is important to understand the different types of loans that are available to you.

While you may look at different loan options in terms of what you can use your loan for, you may also look at secured and unsecured personal loans.

What is a personal loan, and what are the differences between secured and unsecured loans?

What is a Personal Loan?

A personal loan is a loan provided to you as an individual, for personal expenditure and is based on the information provided when you make an application. At NOW FINANCE, we compare the information you provide to our eligibility criteria as well as running a credit check using VEDA, Australia’s largest credit bureau.

We will also ask the reason why you need a loan, as we may be able to provide you with a specific solution depending on why you need the money.

Individuals may seek a personal loan for many reasons, but in their most basic form, they allow someone to acquire the capital to make a purchase and repay over time, rather than needing to save up for an extended period of time. However, people may choose to take out a loan to top up savings towards a purchase as well as use a loan to cover the entire cost of something.

Secured Loans

A secure loan is ‘secured’ when the borrower puts up collateral i.e. an asset to cover their loan in the event that they default on repayments.

For example, a secured personal loan of $200,000 may be secured against your home, assuming you hold equity to that value in your property. A smaller loan of say $40,000 may be secured against your car.

When you take out a secured loan, you must understand that the lender may repossess or seize the asset(s) if you default, and may sell the asset(s) in order to discharge.

Secured loans usually allow the borrower to access greater amounts of finance, are paid back over a longer period, and as the risk factor is reduced owing to the collateral held against the loan, lower interest rates may be offered.


Unsecured Loans

In contrast to a secured loan, an unsecured loan is solely reliant on your ability to repay through your financial means.

A decision to decline or accept an application for an unsecured personal loan will be made based on a lender’s eligibility criteria as well as a credit check. These will be factored into a secured loan application, too, however the collateral security is also a strong factor in such cases.

As unsecured loans are based on a borrower’s ability to repay through their own financial means, the main factors lenders look for are stable, secure employment, and an income level that will allow them to repay, as well as the factors that will be taken into account during a credit check.

Due to the nature of an unsecured loan, these loans offer access to lower amounts of capital than secured loans, and though the repayment period will differ by lender these are typically shorter. The increased level of risk on the part of the lender owing to the lack of collateral means interest rates on unsecured personal loans will likely be higher.

Fixed Rate Loans

Variable Rate Loans

How Much Can I Borrow?

Due to the nature of an unsecured loan you can usually borrow less than you would with a secured loan. NOW FINANCE offers unsecured loans up to $40,000. As secured loans are backed by collateral the amount you can borrow may be significantly higher compared to an unsecured personal loan.

Interest Rates

Unsecured loans offer a greater degree of risk to the lender, so interest rates will be higher. The collateral against a secured loan reduces the risk to the lender, so interest rates will be lower.

Repayment Periods

Unsecured loans are typically subject to shorter repayment periods. NOW FINANCE offers repayments over up to 84 months. As the amount of borrowing may be higher the repayment period on a secured loan may also be longer.

What if I Can’t Repay?

Relevant notices will be added to your credit file making it harder for you to obtain credit in the future. Whatever you have used as collateral to secure your loan may be used to finance repayments, while notices may also be added to your credit file.

The Right Loan for You

Whether a secured or an unsecured personal loan is right for you will depend on your individual circumstances as well as the level of capital you are looking for, and the purpose of the loan.

If you are unsure about which loan is right for you then you should seek financial advice prior to making any loan application.


Disclaimer:  This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs.  Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.

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