Bayport Blog
The difference between secured and unsecured loans
Published: January 22, 2020
Categories: Personal loans
Tags: Responsible lending
Know the difference between secured and unsecured personal loans
When you decide to get a personal loan, there are many factors to consider. One of them is whether a secured or an unsecured personal loan is best for you.
Let us start with the basics and look at the difference between secured and unsecured credit.
Simply put, secured credit means the bank, or the lender, holds one of your assets – such as your house or your vehicle – in exchange for giving you the loan. This asset serves as security: if you don’t repay the loan, the bank will sell your asset to recover the money you borrowed. Examples of secured credit are home loans and vehicle financing.
With unsecured credit the bank, or the lender, doesn’t have any asset to hold onto in exchange for giving you a loan. All the lender has is your promise to repay the loan, which means the lender takes on a bigger risk than with secured credit. That’s why your credit history and payment behaviour are such important factors when you apply for unsecured credit. Examples of unsecured credit are credit cards, microloans, personal loans and retail store accounts.
Pros and cons
| Secured loan | Unsecured loan | |
|---|---|---|
| Interest rates | Secured credit is less risky for the lender; hence this type of loan carries a lower interest rate. | Interest rates are higher because the lender takes a bigger risk. |
| Impact on assets | If you don’t pay back your loan, you could lose your car or home, and all the premiums you paid until then. In the worst case, you could lose your car or your house and still end up owing the bank money, if they were not able to recover the total outstanding amount. | No impact, because your assets are not linked to the loan. |
| Credit rating | If you default, your credit rating will be affected negatively, which means you will battle to get credit in the future. | If you default, your credit rating will be affected negatively, which means you will battle to get credit in the future. |
| Processing time | Can be more than a week, especially for a home loan. | Lenders generally give you an answer within a few hours. |
| When to use it | When you need a large loan for a high-value asset. |
To cover emergency expenses. To cover smaller expenses, such as furniture, school fees or travel. |
| Requirements |
An asset to secure the loan. Proof of identity. Proof of residence. Proof of income and expenses to determine affordability. Strong credit record. |
Proof of identity. Proof of residence. Strong credit record. Proof of income and expenses to determine affordability. |
Once you have decided what type of loan is best for you, you have some more homework to do.
Start by getting an idea of what you can afford. Simply click here to access Bayport’s personal loan affordability calculator. Play around with amounts and repayment periods to get a very good idea of what the monthly instalment would be for your unsecured personal loan.
Now you can plug this instalment estimate into your personal budget to see how it fits into your income-and-expenses picture. In order to afford a loan, it might be necessary to review your expenses and cut out any unnecessary expenditures, such as getting takeaways or driving your car needlessly.
Armed with an understanding of your financial situation, you have to research the companies you can borrow from. Only do business with lenders who are registered financial services providers – they are bound by the regulations that were put in place to protect consumers. You don’t want to become a victim of reckless lending.
Shop around, read reviews online and ask other people for their experiences with different lenders. Your financial wellbeing and peace of mind depend on a responsible lending experience.
An unsecured personal loan can be a great tool to achieve your financial goals, provided you know what you are getting into and how it fits into your bigger financial picture.
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