Secured vs Unsecured personal loans: What’s the difference?

Personal loans could be a handy tool to help you meet your financial goals, a way to manage unexpected expenses or debts, and may offer timely help for financing your life goals. 

Planning a wedding, a house renovation, your dream holiday and buying a new car are all common reasons for taking out a personal loan. They’re also often used to consolidate debts and cover medical or education expenses.

Whatever your reason to apply for a loan, it’s important to understand the difference between secured and unsecured personal loans, as well as the impact interest rates can have on your loan. So, here’s how it all works.  

What is a secured personal loan?

A secured personal loan is a type of loan that is backed by security (or collateral) – an asset of value. For Westpac secured loans, only a car can be used as security for the loan.

A secured personal loan typically offers lower interest rates compared to unsecured loans. This is because the lender has a lower risk, because if the borrower fails to repay the loan, the lender can take the security to recover their losses. Another benefit of secured personal loans is the potential for higher borrowing limits, as the loan is backed by an asset. 

• Explore Westpac secured loans

What is an unsecured personal loan?

An unsecured personal loan doesn’t require any security. Instead, the lender’s decision to approve the loan is based on the borrower’s credit history, ability to make repayments, and relationship with the bank. Factors including income stability and existing debt obligations may also be considered to make sure the borrower can comfortably manage the loan. Because there’s no asset backing the loan, unsecured loans usually come with higher interest rates. 

An unsecured personal loan is quicker access to funds, as there’s no need to evaluate security. Unsecured loans may also offer greater flexibility in terms of use, as they’re not tied to a specific asset. 

• Explore Westpac unsecured personal loans

Comparison: secured and unsecured loans

When comparing secured and unsecured personal loans, it is important to remember the purpose of the loan and what you want to use if for. It may also help to consider: 

• Interest rates: A secured loan typically offers a lower interest rate than an unsecured loan as it is backed by an asset, the car, for security. 
• Loan amount: A secured loan can allow for larger borrowing amounts since the lender has the assurance of the car for security. 
• Accessibility and eligibility: A secured loan may be more accessible to borrowers with lower credit scores since security reduces risk. An unsecured loan may require a higher credit score and strong financial history but does not require security. 
• Application process: Unsecured personal loans generally have a faster approval process as no security needs to be evaluated. 
• Examples of use: A secured loan can only be used for purchasing a car, where the security is tied to the purpose of the loan. Unsecured loans may be suitable for expenses such as home renovations, consolidating debt or covering unexpected expenses. 

Interest rate types: fixed vs variable 

When you take out a secured or unsecured personal loan, you’ll also need to decide between choosing a fixed or variable interest rate. 

A fixed interest rate remains the same throughout the loan term. A potential benefit is that your repayments stay the same every month, so you’ll have more certainty in budgeting and planning. You can still make extra repayments with no fees with Westpac, however if you want to pay off the entirety of your loan sooner, you may need to pay an early repayment fee. 

A variable interest rate may go up and down over the loan term, depending on market conditions. The potential benefit is that if rates go down your repayments may be lower, saving you money, however, if interest rates rise you may have to make higher repayments.

How to choose the right personal loan for you

Choosing the right type of personal loan depends on your financial situation and loan purpose. You’ll also need to keep in mind your income, expenses and overall financial health. If you’re looking to buy a car, a secured loan might be suitable. For other purposes, an unsecured loan could be a better fit. 

It all comes down to making an informed decision about what’s right for you. 

• Read more about Westpac personal loans

How to apply for a secured or unsecured loan 

You can apply for a personal loan with Westpac online or in any branch. Before you apply online you can calculate your personalised rate and repayments in less than 5 minutes, and your credit score won't be impacted. When you submit an application, you'll receive a response in 60 seconds.

For all Westpac personal loans, you’ll need to be aged 18 or over, show regular permanent income, ensure you’re up-to-date with regular payments (such as rent, phone, credit cards) and have a fixed Australian residential address. 

To get started, choose the purpose of the personal loan, and follow the application steps. 

You can also access a range of calculators, including the car loan calculator, borrowing power calculator, and repayment calculator, so you can find out how much you could borrow and what your repayments might look like before you apply.

• Explore Westpac personal loans

To sum up

Not all personal loans are the same, so when you decide to apply for a personal loan, choosing between a secured and unsecured loan is a significant decision, requiring careful consideration of your circumstances and needs. By understanding the difference and evaluating your situation, you can make a well-informed decision that best supports your financial goals.