Secured personal loans are an enticing financing option for those who need funds to cover significant expenses while benefiting from lower interest rates and potentially higher borrowing limits. These loans are very useful for those with major financial goals, such as purchasing a vehicle, consolidating debt, or funding home renovations. At Handy Finance, we’re all about ensuring our customers are armed with all the knowledge they need to make an informed decision when it comes to their finances. This guide has everything you need to know about secured personal loans, including how they work, their benefits and drawbacks, and important considerations before applying.
How secured personal loans work
Secured personal loans involve a process where the borrower pledges an asset—commonly a vehicle in the case of Handy Finance—as collateral to secure the loan. This collateral provides a safety net for the lender, ensuring they can recover their funds in case the borrower defaults on the loan.
Step-by-step process of obtaining a secured personal loan:
- Application: The process typically starts with the borrower submitting a loan application that includes information on the desired loan amount, the purpose of the loan, and the borrower’s financial situation and income details.
- Collateral Evaluation: The lender evaluates the value of the collateral—such as your vehicle—to determine the loan amount they are willing to offer. The loan amount is usually a percentage of the collateral’s value, ensuring that the lender can recoup their investment if necessary.
- Loan Approval: Once the collateral is assessed and the borrower meets the lender’s requirements, the loan is approved. The lender disburses the loan amount, which the borrower can use for their intended purpose, whether it’s buying a new car, consolidating debt, or making home improvements.
- Repayment: The borrower begins making regular repayments according to the agreed-upon schedule. These payments include both the principal amount and interest, and they continue until the loan is fully repaid.
- Collateral Risk: If the borrower defaults on the loan—meaning they fail to make the required payments—the lender has the right to repossess the collateral. In Handy Finance’s case, this would mean repossessing the vehicle used as security for the loan. The repossessed asset is then sold to recover the lender’s losses.
This process illustrates how secured personal loans provide both security for the lender and financial flexibility for the borrower. However, it also highlights the importance of being able to meet repayment obligations to avoid the risk of losing your collateral.
Benefits of secured personal loans
Secured personal loans offer several advantages, making them appealing to borrowers with valuable assets who want to minimise their borrowing costs.
- Lower Interest Rates: One of the most significant benefits of secured personal loans is the lower interest rates they offer compared to unsecured loans. Because the loan is backed by collateral, lenders face reduced risk, allowing them to provide more competitive interest rates. Lower interest rates translate into lower monthly payments and a reduced total cost of borrowing over the life of the loan.
- Higher Borrowing Limits: Secured loans often allow borrowers to access larger loan amounts than unsecured loans. The presence of collateral gives lenders the confidence to lend more substantial sums, which can be particularly beneficial if you need a significant amount of money for a major purchase or project.
- Easier Approval Process: Secured loans are generally easier to obtain than unsecured loans, especially for borrowers with less-than-excellent credit. The collateral provides added security for the lender, making them more willing to approve the loan even if the borrower’s credit history isn’t ideal.
These benefits make secured personal loans an attractive option for those who have valuable assets and want to take advantage of lower interest rates and higher borrowing limits.
Drawbacks of secured personal loans
While secured personal loans offer numerous advantages, it’s essential to be aware of the potential risks and drawbacks associated with this type of financing.
- Risk of Losing Collateral: The most significant risk of a secured personal loan is the possibility of losing your collateral. If you default on your loan repayments, the lender has the legal right to repossess the asset you pledged as collateral. In the case of Handy Finance, this would mean losing your vehicle, which could result in a significant financial loss and inconvenience.
- Potential Credit Score Impact: Defaulting on a secured personal loan not only puts your collateral at risk but also negatively affects your credit score. Missed payments and repossession will be reported to credit bureaus, which can lower your credit score and make it more challenging to obtain credit in the future.
Understanding these risks is crucial when considering a secured personal loan. Borrowers should carefully assess their ability to meet the loan’s repayment terms to avoid the potential downsides.
All car loans with Handy Finance are secured loans. If you wish to sell a car under finance, we can provide a payout letter to the customer for the person who purchases the vehicle to pay the funds directly to us, allowing the security to be removed. Alternatively, you will need to either refinance the loan or pay it off in full to release the security. In some cases, a security swap can be arranged if you are purchasing another vehicle.
Things to consider before applying for a secured personal loan
Before applying for a secured personal loan, it’s essential to evaluate your financial situation and the terms of the loan:
- Do You Have Suitable Collateral? Ensure you have an asset of sufficient value to secure the loan amount you need. If you get a loan to purchase a car, said car can act as suitable collateral.
- Can You Afford the Repayments? Carefully assess your financial situation to determine if you can consistently meet the repayments. This includes considering your income, expenses, and any other financial obligations.
- Compare Loan Options: Before applying for a personal loan, it’s important to compare your available options and ensure you’re making the best financial decision for your needs. You can use the Handy Finance Loan Calculator to estimate your borrowing power and calculate your repayments based on your desired loan amount, loan term, and your credit score.
Considering these factors will help you make an informed decision and choose a loan that is appropriate for your financial capabilities.
Secured personal loans vs. Unsecured personal loans
Understanding the differences between secured and unsecured personal loans is crucial when deciding which option is best for you:
- Collateral Requirements: Secured loans require collateral, while unsecured loans do not. This means secured loans are typically easier to obtain if you have valuable assets, whereas unsecured loans rely heavily on your creditworthiness.
- Interest Rates: Secured personal loans generally offer lower interest rates due to the reduced risk for the lender. Unsecured loans, on the other hand, tend to have higher interest rates as they are not backed by collateral.
- Borrowing Limits: Secured loans may have higher borrowing limits than unsecured loans, giving you access to more substantial funds if needed.
These comparisons highlight why secured personal loans can be an excellent choice for those who have collateral and want to take advantage of lower interest rates and higher loan amounts.
Need loan help? We’re here for you
Secured personal loans offer a reliable way to access funds at lower interest rates and with potentially higher borrowing limits, especially when using a vehicle as collateral. However, it’s essential to carefully consider the risks and ensure you can meet the repayment terms to avoid losing your asset. If you’re considering a secured personal loan and need more information, the Handy Finance team is here to help.
Approvals are subject to Handy Finance’s credit criteria and responsible lending requirements. Fees, charges, terms and conditions apply. Finance provided to approved applicants by OurMoneyMarket Lending Pty Ltd ABN 64 605 231 669, trading as ‘Handy Finance’ holds Australian Credit Licence number 488228 and is a member of the Australian Financial Complaints Authority (AFCA). The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances. We recommend you obtain independent advice before acting on any information in this article.