What should you look for when comparing secured personal loans?
When comparing these products, there are several factors you should be considering:
Interest rates
The most important factor in any loan is how much interest you will pay on it. Interest rates will vary significantly between providers, and will depend on whether your loan is fixed or variable. Fixed-rate loans might offer a higher rate, but won’t change, which could help with budgeting. In contast, variable-rate loans can change, but there is often added flexibility such as a redraw facility and many have the ability to pay off the loan early without penalty.
Length of loan
Secured loans normally allow for a longer period to make repayments than unsecured loans. The standard range is one to seven years, although some lenders offer up to 10 year terms. Keep in mind though, that the longer you spread your repayments across, the more interest you will end up paying ultimately.
How much you can borrow
Lenders will usually establish both a minimum and maximum amount they are willing to give out. Typically, a personal loan secured against an existing asset will range between $1,000-$100,000, but different providers will have different ceilings, so you’ll need to find one that offers an amount that will suit your requirements.
Additional features on offer
Although these loans tend to be fairly simple, some will still have extra features that are worth considering. Some loans will allow you to redraw, or make early repayments.
Additional fees and charges
Most loans will include additional fees and charges on top of the interest rate. These may include application or establishment fees, monthly account fees or early repayment fees. A good way to work out the actual cost of a loan, taking these into account, is to refer to the comparison rate, which you will see in the comparison table above. This includes these additional charges, and offers a more accurate estimate of your out of pocket expenses than just the interest rate. If you find a product where the comparison rate is much higher than the interest rate, this likely means there will be plenty of additional fees involved.
What can I use as collateral?
Vehicle
Cars are typically used as security for the loan to buy the car itself; however, there are certain personal loans you are able to secure using a car you already own. You also may be able to use other vehicles, like a boat or a caravan.
As vehicles can depreciate quickly, it is very possible to owe more on the loan than the car is worth, called negative equity. This means the lender will want to ensure your vehicle has enough value for them to be able to recoup the loan amount by selling it, so often there will be restrictions on the vehicle’s age and condition.
Property
If you have built up enough equity in your home, or own it outright, you can apply for a home equity loan. This is a type of personal loan secured against the equity in your house, and will normally have lower interest rates than normal personal loans.
Cash
Some personal loans can be secured against money in a savings or term deposit account, called cash secured loans. Securing a loan with a term deposit is one of the most popular ways outside of vehicles and usually have low interest rates, as the lender could be guaranteed 100% of the loan value in the event of a default.
Other assets
If you own some other expensive asset, like art or antiques, you may be able to use them as security as well.
How do I apply for a secured personal loan?
Firstly, you’ll need to work out your borrowing potential, as well as how big a loan you need. Then, once you have compared all the various products on offer and found the loan that is right for you, you’ll need to put in an application.
You’ll need to provide several documents for your loan application. This will vary from provider to provider, but generally any loan will need several documents to verify your identity, as well as proof of income to verify that you will be able to make your repayments. Secured loans also will require some information about the asset you are providing as security. This will probably include evidence that you actually own the asset in question, as well as verification that it currently has the value it needs.
What are the advantages of securing a personal loan?
Lower interest rates
Secured loans generally have lower interest rates than unsecured, as they are less risky for lenders.
Ability to borrow larger amounts
The reduced risk for lenders with secured loans also means your borrowing capacity is expanded.
Improve your credit score
By taking on a personal loan and making all of your repayments in full, you demonstrate your ability to meet debt obligations. This will make lenders see you as a safer bet, which can help you if you would like to apply for subsequent larger loans in the future.
What are the disadvantages?
Risk to your property
Using an asset as collateral for a loan means that your lender can claim it and sell it if you are unable to make your repayments. This can also affect your credit score.
Loan is contingent on the value of the asset
You can only use an asset as a security for a loan to the extent of its value. If you have an older car, or have not built up much equity in your home, you will probably not be able to get a large loan, as the asset you are putting up as collateral is less valuable.
Negative equity
Taking out a loan against a depreciating asset such as a vehicle could mean you end up owing more on the loan than the vehicle’s value. If you default on payments, your lender will take your vehicle and still chase after the residual debt. You can purchase gap or equity insurance that covers this potential shortfall but this is an added cost.
Is a secured loan right for you?
Are you looking to make a large purchase?
Taking out a secured loan may help you increase your borrowing power, because you put up an asset you own, such as a house, car or even term deposits, as guarantee of repayment.
Our comparison table breaks down the maximum cost, minimum monthly repayments and current interest rates for different secured loan offers from a range of banks and credit unions.
Why would you take out a secured personal loan?
There are two types of secured personal loan. Firstly, a loan you take out to buy a specific asset, which is secured with the asset itself. Home and car loans are the most common examples, but these loans are also common for boats, jet skis, caravans and other major purchases.
The second type is a personal loan that you put up an asset you already own as collateral. These funds do not have restrictions on how they can be spent, but there will be restrictions on what you can put up as collateral. Loans of this type are used for a variety of purposes. Among the most common are holidays, weddings, or to reduce or consolidate credit card debt.
