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Secured vs. unsecured personal loans: how to choose what's best for you

By Cameron Thomson ·
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Money for a loan

If you’re thinking about getting a personal loan, chances are that you’ve come across “secured” and “unsecured” loans, but maybe you weren’t exactly sure what the difference between the two loan types is.

Both have their advantages and disadvantages, so it’s good to keep in mind what you’re intending to use your loan on. Afterall, both personal loan types are better suited for different situations.

What are Secured Loans?

Choosing a secured loan means putting something of value on the line—this is known as collatoral. Assets that you can put up for security might be a car, a home if you own a property. Just keep in mind that, if you default on the loan, the lender can seize the asset used as collateral.

Since lenders consider secured loans less risky than unsecured loans, due to valuable assests they often offer lower interest rates, larger loan amounts, and longer repayments terms, making them an appealing choice for larger investments like home renovations or a new car.

Secured Loan Advantages

Borrowers may find that secured loans have some advantages that may be worth considering. 

  • As mentioned before, secured loans will generally have a lower interest rate
  • As your loan is secured against an asset, lenders usually don’t need as high a credit score as unsecured loans.
  • Secured loans can also have longer terms, making regular repayments more manageable. 
  • They generally allow for larger amounts to be borrowed.

Secured Loan Disadvantages

While secured loans offer some advantages, there are some downsides that borrowers may want to consider when looking to take out a secured personal loan.

  • Larger loans could lead to overborrowing
  • If you fail to make repayments, you may find your asset repossessed. 
  • Longer terms could mean more interest paid overall than if the loan term were shorter.

What are Unsecured Loans?

Unsecured loans are loans that don’t need an asset put up as collatoral, meaning you don’t need to own a home or vehicle in order to get a loan. 

Unsecured loans are usually better for smaller, short-term expenses, like covering a vacation, consolidating high-interest credit card debt, or even for buying a second hand car. Just keep in mind that there interest rates, on average, will tend to be a bit higher than personal loans.

As you’re not securing any assets to the loan, you won't lose your house or car if you can't make the repayments, but there are still consequences. These can include damaged credit scores, increased interest rates, and legal action. 

Unsecured Loan Advantages

While unsecured loans may not have the same advantages as secured loans on a long term basis, there are still some advantages worth considering.

Unsecured Loan Disadvantages

Unsecured loans can There are also some downsides to unsecured loans that you may want to consider such as:

  • Higher average interest rates than secured loans
  • Generally require a higher credit score
  • May need a minimum income

Personal loan considerations

As mentioned before, secured loans usually have lower interest rates because of the reduced risk for lenders. However, how big is the difference between the two personal loan types?

Loan Type
Average Interest Rate*
Unsecured Personal Loan
10.08%
Secured Personal Loan
8.84%

*Average interest rates calculated on the Mozo database considering both variable and fixed interest loans of $10,000. Correct as of 7 July 2023.

While the average rates point towards secured loans, it’s good to keep in mind that there are a good number of unsecured loans that currently sit below average of secured loans. Therefore, aside from interest rates, it’s important to consider other factors that could be helpful such as:

  • Your ability to repay
  • How much you’re borrowing
  • Your credit score
  • Income and income reliability 
  • How much you have in savings

Secured vs. Unsecured Loans: Which one?

Personal Loan FAQ

What is the difference between fixed and variable rate personal loans?

A fixed rate loan will have its interest rate set at a specific rate for a set period of time. Alternatively, a variable rate loan will change whenever rates rise or are cut. Variable rate loans can also be payed off with early repayments—however, on the other hand, not all fixed rate loans have an early repayment feature and tend to have a fee associated with it. Therefore, it might be helpful to think about variable rate loans as flexible while fixed rate loans are more for borrowers who need the certainty of a fixed payment schedule.

What is a credit score?

A credit score is a way of identifying someone's creditworthiness, usually quantified as a number between zero and 1,000. Generally, it is calculated by looking at factors such as your payment history, debt, income, and recent applications for new credit. Keep in mind that banks and lenders will use a credit score to not only assess your suitability as a borrower but to also determine the interest rate you’ll be offered.

Whether a secured or unsecured loan is best for you will depend on  what you are planning on using the personal loan for and your financial situation. Before you choose the loan type you should crunch some numbers and find out where you’re at in your financial situation such as your credit score, ability to make repayments, how much disposable income you have, and your savings.

Not sure which loan provider is right for you? At Mozo, our database of personal loans can be a great way to compare lenders so that you know you’re getting the loan that works best for you.

Compare personal loans - last updated 28 April 2024

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Cameron Thomson
Cameron Thomson
RG146
Money writer

Cameron has a Bachelor of Creative Writing and History, and a background in broadcast media from his time at 2SER Radio. This diverse set of skills has informed his analytical yet creative approach to dissecting financial data and uncovering long-term trends in consumer finance. Cameron is RG146 certified for Generic Knowledge and keeps a keen eye on current and historical deposit and savings rates on the Mozo database. Cameron is also interested in tracking the investment space, particularly share trading platforms, to help Aussie consumers save and invest their money more wisely.