Secured Vs Unsecured Loans – Making A Good Choice

Secured vs unsecured loans are the two options you may not have considered in your loan search. Depending on what you are looking for, you may or may not have a choice. However, understanding the difference when searching for your cash loans can ease the stress of the process.

Whether you are looking for no credit check loans or a mortgage loan, there are many variables to consider. Your situation may alter what your loan looks like. Regardless, you should understand the concept of securing loans. Increase your financial literacy by understanding all the basics of secured vs unsecured loans.

Please note that specific ideas and products presented in this article may not be on offer by Monzi or the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What is a secured loan?

A secured loan is a loan that you protect with an asset. Unfortunately, security does not protect you. It protects your lender should you fail to make your repayments. The only thing protecting you from the adverse effects of a loan is your responsibility and accountability.

What securing a loan does give you is generally the potential for decreased interest rates. This means that, providing you are responsible, securing a loan may save you money in the long run with certain loan types. There are a large number of assets you can use to secure a loan. Depending on your lender, these may vary. However, supplying security may help you to be smarter with your loan.

What is an unsecured loan?

An unsecured loan thereby is the opposite. Choosing not to secure your loan is perfectly fine. Some loans simply may not require any security; others may allow you to choose not to. Naturally, it seems that choosing not to secure your loan may not be the best decision. However, this all comes down to what you’re looking for.

If you believe you can manage such a loan, it may be less hassle to take a loan that doesn’t require security. However, if you are looking for a more significant amount, not providing security may not be an option. This is because borrowers are generally more likely to repay a significant amount when their home is on the line.

Secured vs unsecured loans: What is collateral?

Before this article progresses, it is essential to note that secured vs unsecured loans can have multiple names. Securing a loan or an object can also be referred to as submitting collateral, a guarantee or guarantor loan, paying a bond, or putting down a deposit.

Regardless of the type of loan you take, whether for money or rental purposes, you will need to protect your lender. Meaning that, aside from a bond, most of these terms are interchangeable when talking about money loans.

Is it a bad idea to secure a loan?

Whether or not securing a loan may be a ‘bad’ idea is dependent on you as the type of borrower. It is wise to put some kind of collateral forward for your loan in most situations. A secured loan lowers the risk for your lender, meaning they may be more inclined to lend to you. However, it increases your risk as the bank can repossess your asset if you fail to repay.

However, this does raise the question of ‘should you be taking a loan if you don’t believe you can repay?’ The answer to this is almost always no. However, it can happen if you don’t do your research. The best way to fix this is by reading up on the subject and fully understanding whatever financial decision you are making. A great place to start is the government’s MoneySmart website, as it has an abundance of information on loans.

Advantages and disadvantages of secured vs unsecured loans?

All things in life come with pros and cons, not just secured vs unsecured loans. However, this is especially important when it comes to financial decisions. It’s hard to throw a blanket over all loan types; however, generally, collateral advantages outweigh the disadvantages.

Secured vs unsecured loans: Advantages

  • You may be able to lower your loan’s interest rate by supplying collateral.
  • Security may permit you access to more significant sums.
  • Securing your loan could help maintain or improve your credit score.
  • It could help you obtain a loan with current bad credit.

Secured vs unsecured loans: Disadvantages

  • You could increase your chances of needing to declare bankruptcy should you fail with your repayments.
  • You may see a decrease in what you can access and an increase your interest rate.

However, there should always be extra considerations attached to whichever decision you make. For example, if you use your car as security, could you afford to live without it? If you are rural or need it for work, it may not be wise to put this towards your loan. Also, consider that even though your loan may be cheaper with security, it could still be beyond your capacity.

What types of loans do you usually secure?

Most loans usually are accompanied by a security of some description. Commonly, you may secure a car loan against the vehicle you are purchasing. Or, your collateral for a home loan may come in the form of a large cash deposit. Most loans, however, will require some security, usually an asset that lists on their approved security list (ASL).

There is such a thing as unsecured loans, however. Payday and personal lenders may offer both secured vs unsecured loans. Generally speaking, smaller sized loans can be exempt from requiring security. For example, with Monzi lenders, it is possible loans under $2,000 might not need to be secured. However, as each lender operates differently, we cannot say that this will be the case.

How does collateral affect interest rates?

One of the most significant deciding factors between secured vs unsecured loans is the influence on interest rates. The way lenders like to operate is by trusting you with their money in the faith that it will be repaid in full by the end of the term. However, they generally want their money back within a reasonable time and to get something out of doing so. Hence, lenders will add interest to your loan.

The higher the risk of the loan, the more likely a business is to increase the attached interest rate. The best way to demonstrate that you are serious about your loan, regardless of the state of your credit score, is to be prepared to put down collateral. Doing so shows that you are serious and intend to make your repayments. This is because most people often place a lot of value on whatever they secure their loan with and will work to keep it. Unsecured loans generally already come with higher interest rates than the average loan.

Secured vs unsecured loans and your business

One of the options you may have available to you if you are a business owner is to secure against components of your business. This is an excellent alternative option when choosing secured vs unsecured loans, as it means your family home will be safe if something goes wrong.

However, if your business itself, or your business assets, are essential to your income, doing this may not always be so smart. Although, this begs the question of what else you would be willing to secure. Hence, whether or not you believe it is wise to secure against your business depends on your outlook on life. If you are desperate for a business loan, you may be able to say:

“look, I need a business loan to maintain my income; I’d be more comfortable securing against my car because my business can help me replace it”.

Alternatively, you could say:

“I’d rather secure it against my business assets because I need to be able to drive my kids to school”.

The ball is really in your court with the decision. Providing you have adequately considered all the reasons you need a loan in the first place. As an alternative to securing your loan, you could always consider business loans Australia alternatives with the Monzi lender-finder for smaller, potentially unsecured loans.

Collateral vs Deposits

When it comes to secured vs unsecured loans, the most common terms you may hear are collateral and deposits. Whilst these are technically the same, collateral usually refers to securing your loan against a physical possession of significant value. In contrast, a deposit is typically a large amount of money that you would put down to secure loans such as mortgages.

Always verify what your lender would prefer early in the process, so you are on the same page and know what to put forward. You can typically do this by reading your lender’s approved securities list and choosing an asset. All sorts of potential assets could be on this list. Generally, however, there are four main categories of assets that you may select from. These include:

  • Home and contents assets, such as your house, car, etc.
  • Financial investments
  • Private companies, partnerships or trusts
  • Various other income streams

Monzi cannot say what may be on the ASL’s of the lenders in our network. However, providing an asset that is of reasonable value may help secure your loan.

Secured vs unsecured loans

When to secure a personal loan?

It is not only the question of secured vs unsecured loans but also when should you secure a loan. Typically, the answer to this is when your lender asks you to. However, as mentioned, the size of your loan could also influence this.

This means that if you only want a small amount of cash, you may not need to worry about securing your loan at all. This is common with personal loans. Since personal loan lenders often have much more lenient criteria, they can be flexible around the need for security. However, this is not all that a private lender can be flexible with; private lenders are commonly known for their flexibility with credit scores. Providing you can show a substantial income stream and have pure intentions, you are more likely to get personal loan approval.

Keep in mind that should you wish; you may still be able to secure your loan, even if it is only relatively small.

Securing bank loans

Financial institutions, such as banks or credit unions, are typically far stricter than private lenders. Meaning that almost every loan you take with a bank is likely to request that you secure your loan. Regardless of its size or the loan type. However, the banks do like to appeal to every category of loan they can reach. This means that it isn’t impossible to take an unsecured loan from a bank.

However, these products typically only include credit cards, personal loans, or a personal overdraft. Generally, a bank will allow you to use these loans for uses such as consolidating your debt, conducting home renovations, or paying for a wedding. This generally simplifies the application process. However, it is still unlikely that a bank loan’s process will be quicker than using the Monzi lender-finder.

What is the better option?

It’s not for Monzi to say which option is better, as this should be a personal decision. You should reflect on your life circumstances and what asset you would potentially use for security. Consider asking yourself what you might do if you were to lose this asset? Do you have a backup plan? How badly do you need a loan?

If you have a questionable borrowing history and are looking to enter into a secured loan, ensure you have taken the steps necessary to stay on top of your loan. On the other hand, do you need a quicker application process that would benefit from the absence of security? Are you ok with potentially paying slightly more on interest?

These are all just some example questions. However, it truly is vital to have a good understanding of how collateral could change your loan.

What do you do if you don’t pay secured vs unsecured loans?

It is wise to do your best to promptly make your repayments in all circumstances. However, sometimes life doesn’t work out the way you may have hoped. If you default on your loan by failing to pay either on time or in full, your lender has the right to take you to court to recover what you owe. Should you fail to produce this money, the lender can repossess your loan’s security and sell it to cover the cost of what you owe. If you refuse this process, further court proceedings may take place.

Should you default on an unsecured loan, your lender can send several requests asking you to pay what you owe. If you do not meet these requests, the outcome will increase in severity. Either option could have the potential to lead to you needing to declare bankruptcy.

If you feel, in advance, that you may not have the facilities to meet your next monthly payment, you should contact your lender. Various lenders may be able to offer you some sort of payment plan or potential repayment freeze. Honesty in times of financial hardship may be your best ally.

Does securing your loan give you access to more?

Yes, in some circumstances, securing your loan may permit you to access a more significant amount. This is not always the case and will vary depending on your lender. However, if you already have a shiny credit report, adding security could entitle you to a more considerable sum.

If you have poor credit, securing your loan may help you to attain the loan you seek. This is more common with smaller loans. It is unlikely that you will add security and increase your mortgage loan size if you already have bad credit.

Is it wise to secure your loan if you have bad credit?

The secured vs unsecured loans question for bad credit depends on a few factors, namely:

  • The state of your credit score.
  • Whether you are operating through a private lender or a financial institution.
  • How much you are looking to borrow.
  • Your money management skills.

If your credit report is looking particularly sad, you may not have much of an option as to whether you need to secure your loan. This is as it is likely that a secured loan is your only option. Either that or you may not be approved at all. If your score is average or below, you might not even have the option of a bank loan. If you have struggled with repayments in the past and your credit history shows this, it may be wise to opt directly for a secured loan. The same goes if you think you may fail with your repayments.

Keep in mind that if you do feel this way, you should avoid seeking a loan. This is as it may only serve to worsen your circumstances in the long run. However, by law, a lender will not be able to approve you for a loan if you cannot repay it. This is in your best interest, even if it may seem unfair at the time.

Will an unsecured loan hurt your credit?

Any loan has the potential to hurt your credit score. Secured vs unsecured loans can either help or hinder your credit, depending on how you manage them. You can still default on personal loans despite whether they are secured. The best way to prevent this is to meet all your repayment deadlines appropriately. If you don’t often take a loan and are unsure if you can do so, there are some ways to help yourself.

For example, before taking a loan, you could use a personal loan repayment calculator. This online tool will help give you an estimate of what you can expect to pay on your loan. Along with how much it might cost you in the long run. Beyond this, you can also consider starting an emergency fund to avoid doubling up on loans by requiring emergency loans. This way, you have extra cash to fall back on if you need it. Once you have decided you can repay a loan, then consider seeking one.

What is the maximum unsecured loan you can borrow?

How large your unsecured loan can be is dependent on the lender. All lenders operate differently, including those in the Monzi network. With Monzi, however, the maximum you can borrow may be up to $10,000. You will need to speak with your lender to identify whether or not you will need to provide security.

Searching elsewhere may give you access to more significant amounts. However, don’t forget that the larger your unsecured loan is, the more at risk you may put yourself in. Don’t intentionally risk bankruptcy if you can avoid it. There are several loan alternatives if you are struggling. Consider first looking into a Centrelink cash advance or financial advisor help before turning towards a loan.

Why do banks offer unsecured loans?

You may not think that the secured vs unsecured loans argument would extend to financial institutions, given their application strictness. However, banks like to cover a whole range of products, providing there is consumer interest.

Given the popularity increase of private lenders and private loans in recent years, it is fair to assume that financial institutions offer unsecured loans to keep up with the market. They could run the risk of becoming obsolete if they continue in their current ways. An unsecured loan option provided by the banks is most likely their attempt not to lose customers to more flexible lending options.

Secured vs unsecured loans no credit check

Monzi cannot say how all lenders might operate when it comes to credit checks and secured vs unsecured loans. However, we can say that when it comes to personal loans, Monzi lenders are far more likely to be able to work with poor credit history. This is because they know that your possible past financial mistakes shouldn’t define you. They may be more willing to account for your situation.

However, if you match with a lender who doesn’t require a credit check, they will instead examine your income, expenses, job, and current debt. A range of factors accounts for your ability to repay a loan. You shouldn’t receive denial over one part of the application. If you match with a lender that does require a credit check, however, it isn’t the end of the world. They will still consider all of the above information, all of which is equally relevant.

Secured vs unsecured loans: Centrelink customers and pensioners

Whether or not you can receive loan approval as a pensioner or while on Centrelink is case by case. It is possible to receive loans for people on Centrelink. However, you will still need to show a regular income for the past three months. Some lenders may consider Centrelink income sufficient, providing you and your family can still live comfortably off it and make your repayments. The same is possible for pensioners. Pension loans are available; however, you will need to show that you can still cover your cost of living and pay off a loan on a pension.

Securing a loan could potentially improve your approval chances in some circumstances. This will depend on your lender and the size of your loan as to whether this is an option. If you are unsure, reach out to your lender for more information.

Monzi and secured loans

The lenders in the Monzi network each have their own take on secured vs unsecured loans. As with most lenders, it may depend on the size of the loan as to whether you will require collateral.

We can’t speak on behalf of each lender’s individual operations, however. We can let you know that Monzi lenders understand that life isn’t always streamlined. When you need someone to take a chance on you, one of the lenders in our lender-finder may be able to offer you a helping hand.

When you need cash quickly, Monzi may be able to find you a lender in as little as 60 minutes. If this sounds like something you need, why not get started today! Or, if you need a little help with the process, all you have to do is ask. You can speak with a member of our friendly team at hello@monzi.com.au.

Want to check out our socials?

We like to keep up to date with the community. If you’ve got a question or simply want to hear what we’ve got to say, why not check out our socials. You can find Monzi on Facebook, Instagram, Twitter and Pinterest.

So, why not say hi? We look forward to seeing you around!

Factor In

Costs

Two credit cards
Two credit cards

You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months (minimum)

12 months (maximum)

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. The minimum and maximum loan term is 12 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

Loan amount

$2,001 - $4,600

Terms

13 months (minimum)

24 months (maximum)

Costs

48% Annual Percentage Rate (APR)

67.41% Comparison Rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principal Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Annual Percentage Rate (APR) for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. The minimum loan term is 13 months and the maximum loan term is 24 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months (minimum)

24 months (maximum)

Costs

21.24% Annual Percentage Rate (APR)

48% Comparison Rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principal Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Annual Percentage Rate (APR) for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. The minimum loan term is 13 months and the maximum loan term is 24 months. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.