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When searching for the right personal loan for your needs, you might be faced with the choice between a secured loan or an unsecured loan. The loan amount may be the same but there are other differences and important information to consider when deciding which is the best option for you.
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A secured personal loan is backed by an asset that you own, used as security for the lender. An asset such as a car, property, cash, term deposit or other high-value assets such as jewellery can be offered as security for the loan as a way to protect the lender against the risk of default. If the borrower doesn't make their loan repayments for whatever reason, the lender can sell the secured assets to recover the money they lent out. A secured personal loan is safer for the lender as they can simply sell the secured asset if the loan repayments aren't made. This added level of safety means that interest rates are usually lower than unsecured loans.
An unsecured loan is a loan given without the borrower offering an asset to use as a backup in the event that they can't repay their loan. An unsecured loan is less risky to the borrower in the sense that their personal property is not at stake if they fail to repay their loan. However, the lender may try to recover the funds via other methods and so, the borrower doesn't get off scot-free if they don't repay their debt. Because there is no asset as a safety net to fall back on, when considering an unsecured loan application, the lender may rely more heavily on aspects such as the borrower's credit history, credit rating and income consistency and amount. They want to be extra sure that the borrower is likely and able to repay the loan.
The loan term differs greatly between a secured personal loan and an unsecured personal loan with the range for unsecured being 1 to 7 years compared to up to 15 years for a secured personal loan.
Despite higher interest rates than secured loans, unsecured loans can have lots of benefits:
Generally, unsecured personal loans are for $2,000 up to $70,000, although it depends on which lender you go with as some will only lend up to $50,000 and others will go up to $100,000. For amounts higher than this, a secured personal loan may need to be considered.
Most lenders, from banks and credit unions through to non-bank lenders, will have their own version of an unsecured personal loan so you should be able to find a product to suit your needs. Traditional banks have rates sitting at approximately 8.99% to 12% while alternative lenders who consider applicants with bad credit have much higher rates for unsecured personal loans, with comparison rates in excess of 50% per annum.