A secured personal loan is a type of loan that uses an asset — like a car — as collateral. In general, secured loans are used if the borrower has poor credit or cannot provide sufficient proof that they can pay off the debt. If you fail to repay a secured loan, the bank can seize your collateral.

It’s more common for personal loans in Australia to be unsecured, meaning the bank will lend you the money without requiring an asset as backing for the loan.

How does a secured personal loan work?

Secured loans require the borrower to put up an item of value as collateral. If they can’t pay off the debt, the lender can sell the item and recoup their money. In other words, secured loans have reduced risk for the lender.

Securing a personal loan with assets

The type of asset you can use for a secured personal loan depends on the lender, the loan amount and the item’s value, but common ones include:

Real property
Cars
Savings or term deposit accounts
Shares
Jewellery
Collectibles with a verifiable on-sale value.

Selling the asset is typically the lender’s last resort. Missed payments will usually first be accompanied by late fees, warnings and some type of financial hardship arrangement.

Types of secured personal loans

Generally, there are two types of secured personal loans: fixed-rate and variable-rate. In many cases, secured loans have a fixed rate. This means you pay the same interest rate for the length of the loan.

Although less common, you could try to get variable-rate secured loans. The interest on this type of loan fluctuates with the market.

Common uses for secured personal loans

Secured personal loans can be used for any purpose, such as paying for:

Whitegoods
Cars
TVs and other electronics
Holidays
Renovations
Debt consolidation
Medical bills.

Secured personal loans may be the right choice for anyone who requires money to pay for any or a combination of the above and who may struggle to get an unsecured loan or revolving credit due to their current financial situation or credit history.

🤓 Nerdy Tip

Did you know that some lenders offer lower rates on secured personal loans for sustainable purchases, such as solar panels or electric cars?

How to get a secured personal loan

To get a personal loan — whether secured or unsecured — there are a few steps to take.

Meet eligibility requirements

Each lender has its own eligibility requirements, but you must typically meet the following criteria to apply:

be over 18 years old
be a citizen or permanent resident of Australia
have a reliable income
have no record of bankruptcy.

After basic eligibility requirements have been met, the lender will need to make sure that the asset can be resold easily to cover the cost of the loan.

Approval is partially based on your credit, so be sure to check your credit score, which is freely available from any of Australia’s three credit rating agencies — Experian, Equifax and Illion.

» MORE: What is the minimum credit score for a personal loan in Australia?

Compare loan terms and conditions

Terms and conditions vary among lenders, but the things you should be sure to compare include:

length of term options
interest rate
any fees, including early repayment penalties
customer service record of the lender
personal loan refinancing options.

As a consumer, depending on how urgently you need the money, it’s always a good idea to shop around for the best deal. If you qualify with one lender, you should, at least in theory, qualify with several others.

Find the best deal

Getting pre-approval from several lenders allows you to get the best deal on things such as fees, frequency of repayments and, most importantly, interest rates. Remember, there are lenders beyond just banks. Credit unions and online lenders are all eager for your business.

Don’t feel obliged to go with the bank you’ve been with since you were a kid if you can get a better deal elsewhere. Alternatively, you can ask your current bank to match an offer you find elsewhere. This may be more difficult if you’re going down the secured loan route and have a chequered credit or employment history, but it never hurts to ask. You should always review the terms and conditions of the loan to ensure there aren’t any hidden fees or nasty surprises, such as penalties for paying the loan out early.

» MORE: 9 reasons you can’t get approved for a personal loan

Should I get a secured personal loan?

Before taking out a personal loan, you should be confident that you can repay the debt on time and according to the terms of your contract.

The risk of losing the asset you put up as collateral, such as your car or house, may not be worth the benefits of the loan. Check to see if you qualify for an unsecured personal loan before considering a secured option.

Here are a few pros and cons to help you determine if it’s the best type of loan for your circumstances.

Pros of a secured personal loan

Fixed interest rates: Secured loans generally come with fixed interest rates, so you know exactly how much your monthly or fortnightly repayments will be.
Easy approval: The quality of your asset may mean it’s easier to acquire a secured loan than an unsecured one, and your lender may offer you a lower interest rate because your loan has collateral.
Flexible loan amounts: Your asset — whether it be a property, car, term deposit or blue-chip shares — may allow you to borrow a larger amount. Although, it’s always better to err on the side of caution so you can pay off the loan and be done with it quicker.

Cons of a secured personal loan

Risk losing the asset: Defaulting on any loan is never a good thing, but defaulting on a secured personal loan could be a double whammy because you also lose the asset you’ve put up as collateral.
Fixed interest rates: Having a fixed interest rate may be a good thing now, given that interest rates are rising, but that situation could change over time. You could miss out on the savings you would get from a variable rate.