Quick answer
A secured personal loan is backed by an asset such as a car or property that the lender can sell if you do not repay. An unsecured personal loan has no asset behind it. Secured loans can allow larger amounts and wider approval, while unsecured loans avoid putting an asset at risk but are often tougher to qualify for.
Key points
- Secured loans put an asset on the line, and unsecured loans rely on your credit and income alone.
- MoneySmart notes unsecured loans usually cost more, because the lender takes on more risk.
- Security can help when credit is imperfect or the loan is larger, but the asset can be sold if repayments stop.
- Either way, what lenders care about most is whether you can afford the repayments.
What is the difference between a secured and an unsecured personal loan?
A secured personal loan is tied to an asset the lender can sell if repayments stop. An unsecured personal loan has no asset behind it, so the lender relies on your income, credit history and promise to repay. MoneySmart, the government’s money guidance site, explains that with a secured loan you offer something like your car as security, whereas unsecured loans do not require security but usually have higher interest rates.
Ownright Custom Finance arranges personal, car, lifestyle and property-backed loans Australia-wide. Director Trevor Scott has spent more than 40 years helping people choose between putting up an asset and going without. This guide lays out the trade-offs in plain English.
How do the two types compare side by side?
| Feature | Secured personal loan | Unsecured personal loan |
|---|---|---|
| Backed by an asset | Yes, such as a vehicle or property | No |
| Risk to the lender | Lower | Higher |
| Pricing | Often lower, depending on circumstances | Usually higher, per MoneySmart |
| Typical loan size | Can be larger | Often capped lower |
| Credit requirements | Can be more flexible | Often stricter |
| Risk to you | The asset can be sold if you default | No asset pledged, but legal action and credit damage are possible |
| Paperwork | More, such as valuations and registration | Usually less |
| Speed | Can be slower while the asset is checked | Can be quicker when the application is simple |
Pricing in particular depends on your circumstances, the lender and the structure, so no table can promise a result. The point is the direction: the more the lender is protected, the more room it may have to say yes.
When might a secured personal loan make sense?
- A larger amount. When the loan is beyond what lenders are willing to give unsecured.
- Imperfect credit. Security can open options that would not otherwise exist. See bad credit personal loans.
- A vehicle purchase. The vehicle itself becomes the security, as with car loans.
- Consolidating debts. Rolling several debts into one repayment, as in debt consolidation personal loans.
- A big expense. Medical, home improvement, relocation or a major purchase through large purchase personal loans.
Our page on secured personal loans shows what assets can be considered.
When might an unsecured personal loan make sense?
- You have strong credit and stable income.
- The amount is modest.
- You prefer not to put an asset at risk.
- You do not have a suitable asset to pledge.
An unsecured loan is not risk-free. If you default, the lender can pursue the debt through collections or the courts, and your credit file can be affected. Our overview at personal loans covers the main options.
What can be used as security?
The usual candidates are:
- Vehicles: cars, utes, motorbikes, caravans, boats.
- Property equity: a first or second mortgage over a home or investment property.
- Cash or term deposits: held with the lender.
- Other valuable assets: sometimes machinery or other items of clear, resaleable value.
For vehicles, the lender typically registers its interest on the Personal Property Securities Register, which lets others check whether the vehicle has a debt against it. For property, the interest is registered on the title. We explain the mechanics in types of loan security explained.
What does it mean if you use your home as security?
Using property equity allows larger borrowing, and sometimes broader approval, but it makes the stakes higher. If repayments fail, the property is on the line. This is where personal loan vs second mortgage becomes a useful comparison. A second mortgage can suit larger sums, longer terms and certain credit situations, while a personal loan is usually simpler and smaller. Depending on your position, we can explore options such as a second mortgage or debt consolidation loans.
What do lenders look at before approving?
- Income and employment: how stable and provable it is. For the self-employed, see how to prove your income without payslips.
- Expenses and debts: what is left after living costs and commitments, explained in what is loan serviceability.
- Credit history: defaults, late payments and recent enquiries. See how to improve your credit score.
- Purpose of the loan: what the money is for.
- The security: if secured, its value, age, condition and ownership.
Lenders also have responsible lending obligations, which is why they ask detailed questions about your finances. That is normal, and the more complete your information, the smoother things tend to run. Our guide on what documents do I need for a loan is a good checklist.
What are the risks of each?
Secured
- The asset can be repossessed and sold if you default.
- A shortfall after sale can still be owed.
- The asset can be tied up until the debt is cleared, which can complicate selling or trading it.
- Insurance may be required.
Unsecured
- Higher pricing and stricter approval are common.
- Missed payments can lead to default listings and collection action.
- Limits can restrict what you can borrow.
If you are struggling with repayments on either type, speak to your lender about hardship arrangements early. MoneySmart’s website also lists free support options.
How does Ownright approach it?
Our starting point is your situation, not the product. We ask what the money is for, what you can comfortably repay and what assets you have. Sometimes the cleanest answer is an unsecured loan. Sometimes it is a secured loan over a car or a modest second mortgage, particularly when a bank has said no or credit is not perfect. We aim to explain what each option means for you before anything is signed. If you have been declined, what to do if your loan is declined is a helpful read.
Mistakes to avoid
- Applying for several loans at once, which can leave multiple enquiries on your file. See why applying for loans everywhere hurts your credit score.
- Pledging an asset you cannot afford to lose.
- Comparing only monthly repayment and ignoring fees and term.
- Not checking whether early repayment fees apply.
- Using a loan to cover a gap without a plan to repay it.
Illustrative examples
These are illustrative situations only, with no real people and no pricing implied.
Someone with a steady wage and clean credit needs a modest amount for a home repair. An unsecured loan may be quick and simple, and there is no reason to pledge an asset.
Someone with a late payment history wants to consolidate several debts into one. Lenders may be wary of an unsecured loan, but a loan secured by a vehicle or by home equity may be considered, with the trade-off that the asset is now at risk.
A self-employed borrower between tax returns needs funds for a work expense. Evidence of income is the sticking point rather than credit, and a lender may ask for security or look at alternative documents.
In all three, the question is the same: what does the lender need to feel comfortable, and what are you willing to put behind the loan? An honest answer to the second question matters more than any product label.
Alternatives worth knowing about
Not every funding gap needs a personal loan. Depending on the situation, alternatives include:
- a personal line of credit for ongoing, irregular costs;
- a secured loan against a vehicle if you own one;
- a hardship arrangement with an existing lender;
- a payday loan alternative if short-term, high-cost credit is on your mind;
- using equity in a property if you have it, with a clear view of the risk.
MoneySmart’s guidance on borrowing and its free financial counselling referrals are good places to check before committing. Taking a few days to compare options is often worth more than rushing to the first approval.
How should you compare two offers?
Line the offers up on the same basis. Check the loan amount, the term, the repayment amount and frequency, the establishment and ongoing fees, any early repayment charge and whether the interest is fixed or variable. For a secured loan, add the questions of what asset is pledged, whether insurance is compulsory and how the security is released. A lower repayment over a longer term can cost more overall, and a shorter term can strain the budget. Working through the numbers with a broker, or with the free calculators on MoneySmart, takes the guesswork out. Our own loan calculator can also help you test a repayment amount before you apply.
Sounds like you need a personal loan that fits?
Sounds like you’re looking for a personal loan, secured or unsecured, that fits your situation. We’re the lending experts in matching personal borrowers with the right structure, so see if you qualify and let’s find a way forward.
Frequently asked questions
What is the difference between a secured and unsecured personal loan?
A secured loan is backed by an asset, usually a vehicle or property, which the lender can sell if you default. An unsecured loan is not tied to any asset, so the lender relies on your credit history and income. MoneySmart says unsecured loans usually carry higher interest rates because of the added risk to the lender.
Is it easier to get a secured personal loan?
Often it can be, because the asset reduces the lender's risk, which may open options for people with limited or damaged credit. It is not guaranteed. Lenders still check your income, expenses and existing debts, and they assess the security's value and condition. The aim is to confirm that you can afford the repayments.
What can be used as security for a personal loan?
Common choices include a car, motorbike, boat or caravan, and sometimes property equity or cash savings. The asset generally needs to be owned by the borrower, free of conflicting claims and in an acceptable condition. Lenders may require comprehensive insurance and may register their interest on the PPSR for vehicles.
What happens if I cannot repay a secured personal loan?
The lender can take steps to repossess and sell the asset to recover the debt, following the contract and consumer credit rules. If the sale does not cover everything owed, you may still owe the shortfall. If you are struggling, contacting the lender early and asking about hardship options is usually better than waiting.
Do unsecured personal loans have limits?
Yes. Lenders usually cap unsecured loans at lower amounts than secured ones, and approval depends heavily on credit and income. The limits and terms differ between lenders. If you need to borrow a larger amount, a secured structure may be needed, which is something a broker can explore.
Can I get a personal loan with bad credit?
It may be possible, but choices narrow and the loan may need security, a guarantor or a smaller amount. Lenders look at why the credit problem happened and how recent it is. A broker can look at which lenders consider applications with defaults or other marks, but approval can never be promised.