The right loan can help you stay on top of your finances, whether you’re buying a new car, growing your business or cleaning up existing debt.
And when you jump online to shop for loans, two terms are going to pop up right away:
- Secured Loans
- Unsecured Loans
These two concepts are the foundation of lending, and understanding how each loan type works is the biggest step you can take toward choosing a loan that supports your goals now and in the future.
Savvy borrowers and business owners know that the goal isn’t just to get extra cash – it’s to get money the right way without ending up in more debt or putting yourself in unnecessary risk.
So whether you want to upgrade the family car, head overseas, or just want to know your options, read on to find the right loan type for you.
Table of Contents
What is a secured loan?
The easiest way to think about a secured loan is that it is backed by a tangible asset (often called ‘collateral’). If you’re buying a car, the vehicle is usually the asset.
Lenders love secured loans because they significantly reduce risk on their end.
Why?
Because of the collateral we mentioned.
If, for any reason, you run into financial speed bumps and can’t make repayments towards your loan, the lender can legally repossess your asset and sell it to try to recoup their losses.
This repossession will sit on your credit file for up to seven years and can have a serious effect on your future borrowing options. That’s why it’s worth staying on top of your payments.
If you’re thinking about a secured loan, here are some examples of potential collateral:
- Real estate (your home or an investment property)
- Vehicles (cars, motorcycles, boats and caravans are standard)
- High-value assets (this could be art, jewellery or valuable collectibles)
- Investments (stocks, bonds or cash held in term deposits)
It’s not a nice thought to imagine losing the car you’ve just bought or having someone claim ownership of your home. Thankfully, there’s a pretty handy upside to a secured loan.
Since the lender’s risk is lower (because of that collateral you put up), they can afford to offer you lower interest rates and more favourable terms. These can come in the form of larger borrowing limits and more flexible approval criteria, even if you have a less-than-perfect credit score.
Nice, right?
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PROS
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CONS
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|---|---|
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Lower interest rate
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Risk of losing collateral
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Higher borrowing limits
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Longer application process
|
|
More flexible criteria
|
|
As long as you can stay on top of your payments, a secured loan can help you fund an exciting new purchase or consolidate debt with lower interest rates and more favourable terms.
What is an unsecured loan?
An unsecured loan is the opposite of a secured loan, meaning it doesn’t require collateral.
You’ll still need to make regular repayments like any other loan, but there’s no risk of losing an asset (like a new car or your home). Before you get too excited, that doesn’t mean you’re totally in the clear, as lenders may go down the legal route to try and recover any owed funds if you can’t make your payments.
Without collateral, lenders are making a bet on you based on your financial history and stability.
This bet all comes down to your creditworthiness, which means they’ll take a close look at your:
- Credit score (the higher, the better)
- Income and employment (they want to know money is regularly coming in)
- Debt-to-income ratio (the amount of debt you have vs. your earnings)
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PROS
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CONS
|
|---|---|
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No asset risk
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Higher interest rate
|
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Faster and simpler approvals
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Stricter credit requirements
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Flexible application
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Lower borrowing limits
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An unsecured loan won’t require collateral, but the lender’s higher risk can be reflected in higher interest rates, stricter lending criteria, and lower borrowing amounts.
FIDO SAYS: It’s worth having a good think about the risk of putting an asset on the line. For example, a secured car loan might help you purchase a new work vehicle, but if you miss your payments, you could risk losing your only way to get to work. Speaking to a car loan finance expert is the simplest way to get the support you need.
Secured vs. unsecured loans: features
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FEATURE
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SECURED LOANS
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UNSECURED LOANS
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|---|---|---|
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Collateral required
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Yes
(e.g., car or property)
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No (relies on creditworthiness)
|
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Interest rates
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Generally lower (lender’s risk is lower)
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Generally higher (lender’s risk is higher)
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Borrowing limits
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Higher
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Lower
|
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Lender risk
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Low (asset acts as a safety net)
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High (no asset to seize and sell)
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Borrower risk
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Risk of losing the asset
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Risk of legal action
|
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Approval criteria
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More flexible (collateral helps approval)
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Stricter (must show creditworthiness)
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|
Loan costs
|
Usually longer
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Usually faster and simpler
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Secured vs. unsecured loans: total costs
Alright, let’s get into some figures.
The total cost of any personal loan depends on three key factors:
- Loan amount (how much you borrow)
- Term amount (how long you have to pay it back)
- Interest rate (percentage charged for borrowing money)
To put those in a real-world setting, here’s an example of a $20,000 loan over a 5-year term to show how the different costs can add up:
|
|
INTEREST RATE
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MONTHLY REPAYMENT
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TOTAL INTEREST PAID OVER 5 YEARS
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|---|---|---|---|
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Secured loan
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7.00%
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$396
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$3,760
|
|
Unsecured loan
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12.00%
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$445
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$6,700
|
In this example, the unsecured loan costs nearly $3,000 more in interest over the life of the loan!
That’s a significant chunk of change, and shows why a secured loan (and the lower interest rate it usually offers) can be such an advantage.
FIDO SAYS: It’s worth remembering that both loan types may also have fees involved on top of the factors we’ve listed above. If you’re excited by the idea of saving on interest but not sure what costs to expect, organise a chat with a Fido finance expert for custom advice tailored to you.
Secured vs. unsecured loans: real world examples
Buying a new car
Thinking about buying a new car?
Secured car loans are probably the most common type of secured financing used by everyday Australians, with the vehicle purchased as collateral.
However, lenders often have conditions before handing out cash for a new or used car. These conditions might include a maximum vehicle age, minimum value requirements, or different rates for brand new cars vs. second-hand vehicles.
Here’s the short and simple version of what to expect when applying for a secured car loan 👇
- New car loans = usually lower interest rate since the asset signals lower risk
- Used car loans = slightly higher interest rates due to vehicle depreciation
The bottom line is that lenders typically adjust their available rates based on your vehicle’s risk and your personal credit profile. So it’s worth improving your credit score where possible.
WAIT! Before you scroll… we wrote this handy guide with a step-by-step roadmap to boosting your credit score.
Consolidating debt
You can also use a secured loan to consolidate high-interest unsecured debts (such as multiple credit cards or small personal loans).
By consolidating smaller debts into one larger loan, you can end up with a lower interest rate and a simplified repayment schedule compared to the multiple higher interest rates you were previously paying.
Keep in mind, the risk of consolidating debt is that you’re turning unsecured debt (which doesn’t put your assets at risk) into secured debt (which puts an asset up as collateral).
This approach is a popular strategy to get debt-free faster by saving money on interest and making repayments simple. On the flipside, you’ll need strong budgeting skills and a clear repayment schedule to avoid putting your assets at risk.
Which loan option is right for me?
Let’s be honest, all this financial info can be a *little* dry. So if you’ve had enough theory, the comparison between a secured and unsecured loan really boils down to one question:
“How can I reduce risk, protect my assets, get approved, and borrow the money I need ASAP?”
OK, that’s technically four questions, but the answer is the same.
If you want to minimise risk and fund your next exciting goal, a dedicated finance broker can help make the decision-making process easier and faster.
At Fido Finance, we can help you compare products and lenders, and secure a personalised rate that works for you. Get in touch and we’ll walk you through the pros and cons of a secured and unsecured loan so you can move forward with confidence.
Chat with a broker now to discuss your financing options by calling the award-winning team at 13 FIDO (13 34 36).
