Loan-troduction
When your business is based on giving money to those who don’t have it, there is always a degree of risk. Therefore, lenders need to ensure they are going to be paid back in one form or another. Some types of loans present more risk than others and this is where secured and unsecured loans come into play.
What is a secured loan?
A secured loan is where you use your assets, such as property, equipment, or vehicles, as collateral for the loan. With this type of loan, if you aren’t able to repay the loan, your lender can claim the assets that you secured the loan with. If you want a secured loan you need to be willing and able to put up some form of collateral. An example of a secured loan is a personal secured car loan.
What is an unsecured loan?
If you aren’t willing or able to secure a loan with your assets, you have the option of an unsecured loan which is a calculated risky move for the lender. With this loan type, rather than the borrower using their assets as security for the loan, their financial history and current situation is used as security. With an unsecured loan, the lender will analyse the strength of a borrower's financial history to determine if lending to them is a good idea. An example of an unsecured loan is an unsecured car loan.
How do secured and unsecured loans compare?
Broadly speaking, the difference between a secured and unsecured loan is straightforward with the key distinction being their need for security. Here are the differences between the two loan types:
Eligibility
- Secured Loans
To apply for a secured loan you need to be at least 18 years of age and an Australian citizen, permanent resident, or eligible visa holder. There are also minimum income requirements you must meet, as well as an acceptable credit score and history. Finally, you need an asset to use as collateral which can include property, equipment, or a savings account.
- Unsecured Loans
The eligibility requirements are similar to secured loans with the exception of a collateral requirement. The lender may also require a higher credit score or minimum income to qualify for an unsecured loan.
Interest Rates
- Secured Loans
Secured loans typically have a lower interest rate as well as longer loan terms. This type of loan can be easier to obtain, even if your credit history isn’t great. However, the lender will need to determine whether the asset you’re putting up is acceptable.
- Unsecured Loans
Unsecured loans will typically attract a higher interest rate to secured loans because of the heightened risk to the lender. These rates will vary depending on your borrowing history and current circumstances.
Loan Amounts
- Secured Loans
Borrowers will usually be able to achieve a higher maximum loan amount with a secured loan. The maximum amounts available to borrowers vary between lenders.
- Unsecured Loans
An unsecured loan will have a lower maximum loan amount which will vary between lenders. The amount a borrower will be able to achieve will depend on their credit, employment history, and other factors.
Fees and Charges
There are fees and charges involved throughout the process of obtaining a loan. These fees and charges can include the application fees, monthly account fees, charges for early repayment, and more. These fees differ between secured and unsecured loans, so it's important to shop around for the best deal available.
Flexibility
- Secured Loans
Unlike unsecured loans, secured loans are not very flexible. For example, a car loan can only be used to purchase the specific car agreed on with the lender. However, the flexibility will often be determinant on the lender’s policies, the borrower’s financial situation, and the collateral used to secure the loan.
- Unsecured Loans
With a secured loan, you are free to spend the money on whatever you like. However, similarly to secured loans, the lender’s policies and your creditworthiness play a large part in determining how flexible your secured loan will be.
Advantages and disadvantages of a secured loan
A secured loan has some great advantages including the opportunity to secure lower interest rates and access to higher borrowing amounts.
However, with a secured loan, it can often take a lot longer to be approved due to the collateral needing to be assessed, and the documents of the assets needing to be obtained. Another disadvantage is that if you are unable to repay the loan, the lender can claim whatever collateral you have offered up which could be your house, car, or more. Furthermore, if you do not have the necessary assets to offer up, or if your business is a start-up or new, there is also a high rate of rejection when applying for a secured loan.
Advantages and disadvantages of an unsecured loan
Compared to secured loans, applications for unsecured loans can be approved quite quickly due to less information and documentation being required. Another positive is that borrowers do not need to put up collateral which increases accessibility and reduces risk for them. Unsecured loans also tend to have smaller borrowing amounts which can be useful for start-ups or new businesses trying to establish themselves.
However, unsecured loans do represent a bigger risk for lenders. Due to this, they will usually involve higher interest rates. Another downside to unsecured loans is that they will typically have small borrowing amounts.
Should you get a secured or unsecured loan?
In short, both loan types have their own risks. For secured loans, you risk losing the asset you’ve put up as collateral. And for unsecured loans, if you are unable to repay, the lender could launch court action to retrieve what you owe.
In determining whether you should apply for a secured or unsecured loan, you first ensure that you meet the eligibility requirements, then, shop around for the best terms and conditions like repayment terms, flexibility, and less fees and charges to find the best loan for your circumstances.
Need a secured or unsecured loan? Or just some advice? JADE Finance has you covered.
Expert consultants, easy applications, competitive rates, and fast turnarounds. These are just some of the integral pillars we offer at JADE Finance to each and every one of our valued customers. If you’re looking to achieve a secured or unsecured loan, receive comprehensive information, specific to your circumstances, to help you make a fully informed decision on the type of loan you want.
At Jade, we offer personal secured car loans, unsecured car loans, unsecured personal loans, secured motorcycle loans, and more. We also offer loans that enable you to use your vehicle as a guarantee for low rate secured car finance.
With more than 25 years of experience in finance, JADE Finance has a stellar reputation in the Australian finance market for negotiating great deals and generally achieving same-day approvals. Be matched with one of our expert brokers and explore your options by contacting us on 1300 000 008 or Request a Quote.
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