5 Key Differences Between Secured and Unsecured Loans

Though understanding lending terms can be difficult, it's important to know your options if you’re thinking about applying for a loan.

This article will explain the main differences between secured and unsecured loan options and some scenarios in which each option may be suitable.

Originally published by Jemima Kelly, 27 October 2022.

On this page:

• What is a secured loan?
• What is an unsecured loan?
• What are the main differences between secured and unsecured loans?
• Pros and cons of secured vs unsecured loans
• Fixed vs variable loans
• Which loan option is best for me?
• Does Jacaranda offer Secured and Unsecured Loans?

What is a secured loan?

A secured loan is a type of loan that requires security, also known as collateral. This means that you will attach something of value to your loan contract, which can be repossessed by the lender in the event that you are unable to meet your repayments.

Common examples of secured loans include:

• Secured personal loans, where you might own an item that is then offered as a security.
• Car loans, where you use the loan to buy a vehicle, which is then secured against the loan.
• A home loan is one in which the bank or lender can resell the property if you can’t meet your mortgage repayments.

Depending on the lender, you could also use other vehicles, valuable items (like jewellery or artwork), and even cash savings or term deposits as security on a personal loan.

At Jacaranda, we generally only accept fully owned assets (such as a motor vehicle) on which a PPSR encumbrance can be registered for Secured Loans.

What is an unsecured loan?

Unsecured loans, as the name might suggest, do not require any kind of security in the loan contract. This can represent a higher risk to the lender, which can often result in less favourable loan terms, such as higher interest rates or smaller loan amounts.

What are the main differences between a secured and unsecured loan?

There are five key differences between the two types of loans:

1. Security 

The most obvious difference between secured and unsecured loans is in the name.

A secured loan is a loan that has collateral attached to it, which is referred to as security. This collateral often comes in the form of a vehicle, such as a car. If a customer has a secured loan and is unable to pay back the loan, the lender has the right to recover the collateral to compensate for losses.

An unsecured loan does not require collateral.

2. Borrowing limits 

By adding security to a loan, you could have a higher chance of securing a larger loan amount. You could also be deemed a less risky borrower and be eligible to borrow more.

For example, at Jacaranda Finance, our personal loans can be used to borrow a maximum of $25,000, but we offer unsecured loans up to $15,000 and ask for security beyond that. 

Unsecured loans could typically be good for things like vet bills, white goods, car repairs and other medium-sized expenses. Secured loans, however, tend to be more suitable for bigger expenses, like large holidays, weddings, debt consolidation and home renovations. 

3. Loan terms

Much like the borrowing limit, a secured loan typically has a longer length compared to an unsecured loan. As a generally more trustworthy borrower, someone with security attached to their loan contract might make a lender more confident in their ability to repay a loan over a longer time period. 

At Jacaranda Finance, we’re flexible with our repayments. On our express personal loans, you have the option to choose a longer loan term of up to 48 months. If all you want to do is pay back your loan and get back to living life, you can opt for a shorter term as well.

4. Interest rates 

By choosing a secured loan, you could potentially access a lower interest rate compared to an unsecured loan as, again, the attachment of security could contribute to you being seen as a less risky borrower. The more reliable you appear in your application, the more favourable your loan contract can be.

Having a good credit score can also help you access more competitive interest rates and loan terms. See our guide on improving your credit score for more information.

5. Application speeds

Secured loans tend to require more upfront documentation (such as your car’s registration number, a purchase invoice, and proof of comprehensive car insurance), so the application process can take a bit longer.

This can potentially be a benefit of using an unsecured loan instead, as there’s generally less information required when you begin your application. Ultimately though, the speed of your application will also depend on the lender.

At Jacaranda:

• You can get started with an application and be done in as little as 5-12 minutes¹.
• Most applicants get a same-day outcome once the application is completed².
• If you accept our loan offer by signing your digital contract the funds are usually in your bank account and ready to use within 60-seconds³ if you have an NPP-enabled bank account.

Advantages and disadvantages of secured and unsecured loans

We’ve collated what we think are the most important pros and cons of secured and unsecured loans into one place below. Bear in mind that these pros and cons can all be situational depending on your financial circumstances and the loan you’re applying for:

Secured or unsecured: Which loan option is best for me?

Depending on your needs, either a secured or unsecured loan could be the right loan option for you. Here are two examples of when a secured and unsecured loan might be suitable.

Example one: Rita chooses a secured loan 

Rita wants to renovate her backyard and is considering a couple of financial options. She estimates the potential expenses and creates a budget for the renovation: The total cost of the work will amount to around $8,500. 

Rita could use her savings to pay for the backyard blitz but would rather keep them for a rainy day. She decided a personal loan could be a good option and applied for an $8,500 personal loan with Jacaranda Finance. 

Rita then attaches her Nissan Hilux as security to secure a larger loan amount and longer loan term, as she has a steady source of income and is confident she’ll be able to manage her repayments. 

After being assessed thoroughly, Rita received the full amount she applied for, which will be repaid in manageable, ongoing instalments for two years. Now it’s time to get to work!

Example two: David chooses an unsecured loan

David’s washing machine has recently been acting up. He’s had to pay for maintenance a couple of times over the past year and decides he needs to buy a new one. David has a young family and needs a decent washing machine quickly. 

David shops around and finds a bundle deal for a washing machine and dryer. A dryer would be a great addition to the family home. The bundle comes to around $5,000 - a bit more expensive than he initially planned but still a great deal, as he figures he’s buying for quality and longevity.

After assessing his financial options, David decides to apply for a white goods loan with Jacaranda Finance for $5,000. As this is a smaller loan amount, David isn’t required to attach security. David receives the money on the same day and snaps up that new washer-dryer combo, and before he knows it his laundry looks like a dream.

Other types of personal loans: fixed & variable interest rates

There are a few more points of difference you should be aware of when choosing a personal loan. Aside from choosing between an unsecured or secured loan, one of the main considerations should also be whether your interest rate is fixed or variable.

A fixed-rate loan guarantees a fixed interest rate for a set period, known as the fixed term. On a personal loan, this is often the entire loan term, but only sometimes. At Jacaranda Finance, our loans come with fixed interest rates.

Variable interest rates, on the other hand, do not come with set rates for a period of time. Instead, they can fluctuate at the lender’s discretion based on a number of external and internal factors, meaning your repayments could change month-to-month.

See our article below on fixed vs variable-rate loans to learn more about each loan type:

Does Jacaranda Finance offer Secured and Unsecured Loans?

Yes, we do!  At Jacaranda Finance, we offer secured and unsecured loan products tailored for various purposes. Our Unsecured Loan option provides loan amounts up to $15,000, while you can borrow as much as $25,000 if you take out a Secured Loan.

Apply now for up to $25,000 and you could receive an outcome on the same day².

Whether you should get a secured or unsecured loan will depend on your individual circumstances. Please contact our customer service team to discuss your options.

Written by - William Jolly

Content Manager

William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.

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