Secured vs Unsecured Personal Loans: What Is the Difference?

When you compare personal loans, you will usually come across two main categories: secured and unsecured.

The key difference is whether you provide an asset as security for the loan. A secured personal loan is connected to an asset, such as a car. An unsecured personal loan does not require you to offer an asset as collateral.

That distinction can affect the interest rate, the amount you may be able to borrow, the application process and what could happen if you cannot make the repayments.

In this guide, we explain the differences between secured and unsecured personal loans, their potential advantages and disadvantages, and the factors you may want to consider before deciding which type could be appropriate for your circumstances.

What Is the Difference Between Secured and Unsecured Personal Loans?

A secured personal loan requires an eligible asset to be used as security. If you do not repay the loan according to your contract, the lender may be able to take and sell the secured asset to recover the outstanding debt.

An unsecured personal loan does not require an asset as security. However, you are still legally responsible for repaying the loan. Depending on the contract and circumstances, a lender may charge applicable default costs, commence debt-recovery action or take legal action if repayments are not made.

Here is a quick comparison:

The exact rates, fees, borrowing limits and approval requirements will depend on the lender and the particular product.

What Is a Secured Personal Loan?

A secured personal loan is backed by an asset, also known as collateral.

The asset gives the lender an additional way to recover the debt if you stop making repayments. Depending on the loan, security might include:

• A car or another vehicle.
• Money in a savings or term-deposit account.
• Certain other valuable assets accepted by the lender.

A car is one of the most common forms of security for a consumer personal loan. A lender may register an interest in the vehicle and retain that interest until the loan has been repaid.

You can learn more about how assets may be used as security in our guide to collateral loans and how they work.

Potential Advantages of a Secured Personal Loan

Providing security can reduce a lender’s risk. As a result, a secured loan may offer:

• A lower interest rate than a comparable unsecured loan.
• Access to a larger loan amount, depending on the asset and lender.
• A longer repayment term in some circumstances.
• A greater chance of meeting a particular lender’s product criteria.

These benefits are not automatic.

A lender will still consider its lending criteria, which may include your income, expenses, existing debts, credit history and ability to afford the repayments.

Potential Disadvantages of a Secured Personal Loan

The most significant risk is that you could lose the secured asset if you do not repay the loan.

For example, using your car as security could place your transport at risk. This may have wider consequences if you rely on your vehicle to travel to work, care for family members or attend appointments.

Other considerations may include:

• Restrictions on selling or transferring the asset during the loan.
• Asset-valuation or registration requirements.
• A requirement to maintain comprehensive insurance.
• Costs associated with establishing or maintaining the security.
• The possibility that selling the asset will not cover the full outstanding debt.

Losing the secured asset does not necessarily cancel any remaining balance. Your credit contract should explain what happens if the sale proceeds are not enough to repay the amount owed.

What Is an Unsecured Personal Loan?

An unsecured personal loan does not require you to provide property or another asset as security.

Instead, a lender assesses your application using information such as your income, living expenses, current credit commitments and repayment affordability. Depending on the lender, it may also consider your credit report or request other financial information.

Because the lender cannot rely on a secured asset, unsecured personal loans commonly have higher interest rates than comparable secured loans.

This is a general tendency rather than a rule, so you should compare the actual rates, fees and conditions of the products you are considering.

Potential Advantages of an Unsecured Personal Loan

An unsecured loan may be worth considering when you:

• Do not own a suitable asset.
• Do not want to place a car or other property at risk.
• Need a relatively modest amount for a specific personal expense.
• Prefer an application that does not involve valuing an asset.
• Want flexibility to use the funds for an eligible personal purpose.

However, unsecured does not mean risk-free. You must still meet the repayments required under your credit contract.

Potential Disadvantages of an Unsecured Personal Loan

Depending on the product and lender, an unsecured loan may involve:

• A higher interest rate.
• A lower maximum loan amount.
• Stricter income, credit or affordability criteria.
• Establishment, administration or missed-payment fees.
• Debt-recovery or legal action if you do not repay the loan.

Missing repayments could also make it more difficult to manage your budget and may affect your ability to access credit in the future.

Secured Loan vs Unsecured Loan: Which Costs Less?

A secured loan may have a lower advertised interest rate, but the interest rate alone does not show the complete cost of borrowing.

When you compare loans, consider:

• The interest rate.
• The comparison rate, when applicable.
• Establishment or application fees.
• Regular administration or account-keeping fees.
• Missed-payment and default fees.
• The repayment amount and frequency.
• The total amount repayable.
• The length of the loan.
• Early repayment fees or restrictions.
• Asset-valuation, registration or insurance costs.

A comparison rate combines the interest rate with most fees to provide a guide to the cost of a loan.

However, it is based on a prescribed loan amount and term, so your actual cost may be different. Some conditional fees may also be excluded.

A longer term can make each scheduled repayment smaller, but it may increase the total interest you pay. A shorter term may reduce the total interest but result in higher repayments.

The appropriate structure depends on what your budget can comfortably manage.

Is a Secured or Unsecured Personal Loan Better?

Neither type is automatically better for everyone.

A secured personal loan might be worth considering when:

• You own an asset accepted by the lender.
• The loan is connected to the purchase of that asset.
• A lower rate would produce a meaningful overall saving.
• You understand and accept the risk to the asset.
• The repayments fit comfortably within your budget.

An unsecured personal loan might be worth considering when:

• You do not own a suitable asset.
• You do not want to place an important asset at risk.
• You need a smaller amount for an eligible one-off expense.
• The loan’s total cost is competitive.
• You can comfortably afford the required repayments.

We encourage you to consider the complete credit contract rather than making a decision based on the secured or unsecured label alone.

Questions to Ask Before Choosing a Personal Loan

Before you apply for any personal loan, it can help to work through a few practical questions.

1. How Much Do You Genuinely Need?

Borrowing more than necessary usually increases your interest costs and repayment obligations.

Start with the cost of the specific expense and subtract any amount you can safely cover using available savings.

Try to avoid adding discretionary spending simply because a higher loan amount is available.

2. Can the Repayments Fit Into Your Budget?

Check what will remain after paying for:

• Housing.
• Food.
• Transport.
• Utilities.
• Insurance.
• Existing debts.
• Other essential expenses.

Do not base the decision on your income alone. A repayment may look manageable until you account for irregular expenses, annual bills and unexpected costs.

3. What Is the Total Amount Repayable?

Look beyond the scheduled repayment and consider the total interest and fees over the entire term.

A lower repayment spread over a longer period is not necessarily less expensive overall.

4. What Happens if Your Circumstances Change?

Consider whether you could still make the repayments following a reduction in working hours, a major bill or another change in your financial circumstances.

For a secured loan, you should also think carefully about the practical impact of losing the asset used as security.

5. Are There More Suitable Alternatives?

Depending on the expense, alternatives to borrowing may include:

• Using savings without depleting your emergency buffer.
• Asking the provider for a payment arrangement.
• Delaying a non-essential purchase.
• Reviewing your budget for temporary savings.
• Checking whether hardship assistance is available.
• Comparing other suitable credit products.
• Exploring a No Interest Loan for an eligible essential expense.

It is worth comparing your options before committing to credit, particularly when another arrangement could meet your needs at a lower cost.

Are Sunshine Loans Secured or Unsecured?

Our loans are unsecured Medium Amount Credit Contracts. You do not need to offer a car, home or another asset as security.

Our current product features are:

You can complete an application online, but every application is subject to our eligibility checks, individual assessment and approval.

You generally need to:

• Be at least 18 years old.
• Have reliable and verifiable take-home income of at least $750 per week or $1,500 per fortnight.
• Receive income from a source other than government benefits alone.
• Be able to afford the repayments without experiencing financial hardship.
• Use the loan for a personal rather than business purpose.

Your income may include employment earnings combined with government benefits, but government benefits cannot be your only source of income.

Meeting our eligibility conditions does not guarantee approval.

Our loans are intended for eligible consumers considering funding for an infrequent, one-off or unexpected personal expense. They are not designed to cover ordinary, ongoing household expenses or business costs.

Before deciding whether our product may be appropriate for you, review our current loan eligibility requirements and loan costs and conditions.

Responsible Lending and Affordability Assessments

Australian credit licensees have responsible lending obligations.

These include:

• Making reasonable inquiries about a consumer’s financial situation.
• Making reasonable inquiries about their requirements and objectives.
• Taking reasonable steps to verify relevant financial information.
• Assessing whether a proposed credit contract would be unsuitable.

For us, this means an unsecured loan is not a loan without checks.

We may review information such as:

• Your bank statements.
• Your income.
• Your living expenses.
• Your existing debts.
• Your other financial commitments.
• The purpose of the loan.
• Other relevant financial information needed to assess your application.

You should always provide complete and accurate information.

Never omit expenses, hide existing debts or change financial documents in an attempt to improve an application.

Frequently Asked Questions

Is a Car Loan Secured or Unsecured?

A car loan may be secured or unsecured.

Many car loans use the purchased vehicle as security, but some lenders offer unsecured loans that can be used to buy a car.

Before you accept a contract, check whether the lender will register an interest in the vehicle.

Do Secured Personal Loans Always Have Lower Interest Rates?

No.

Secured loans often have lower rates because the asset reduces the lender’s risk, but this is not guaranteed.

Your rate may also depend on the lender, your financial circumstances, the asset, the loan amount and the repayment term.

Are Unsecured Personal Loans Easier to Obtain?

Not necessarily.

Although you do not need to provide an asset, a lender still needs to assess your eligibility and repayment capacity.

Some unsecured loans may have stricter income, affordability or credit-history requirements.

Can a Lender Take My Car if My Loan Is Unsecured?

Your car is not the nominated security for an unsecured loan.

However, failing to repay an unsecured debt can still lead to debt-recovery action and legal proceedings.

If you believe you will have difficulty making a repayment, it is important to seek help early.

Does Unsecured Mean There Are No Credit or Affordability Checks?

No.

“Unsecured” only means that a specific asset is not being used as collateral. It does not mean automatic approval or an absence of financial assessment.

When you apply with us, we assess your application individually and consider your eligibility and ability to afford the repayments.

Can I Repay My Sunshine Loans Loan Early?

Yes.

You can repay your loan with us early without an early repayment penalty.

Check your current balance and credit contract, or request a payout figure, before making the final payment.

Compare the Complete Loan, Not Only the Security

The main difference between secured and unsecured personal loans is straightforward: a secured loan uses an asset as collateral, while an unsecured loan does not.

Choosing between them requires a little more thought.

We encourage you to consider:

• The total cost.
• The repayment term.
• Applicable fees.
• Eligibility requirements.
• The purpose of the loan.
• What could happen if your financial circumstances change.

For a secured loan, carefully consider whether any potential cost saving justifies placing an asset at risk.

For an unsecured loan, make sure the repayments and potentially higher costs remain affordable.

We offer unsecured personal credit to eligible consumers considering a specific, one-off personal expense. Before applying with us, compare your alternatives and read our eligibility information, cost details and frequently asked questions.

If you believe our loan may be appropriate for your circumstances, you can review our eligibility requirements before applying.

If you already have a loan with us and are concerned about making a repayment, contact us as early as possible so that we can discuss your circumstances and available support options.

The information provided in this blog is for general informational purposes only and does not constitute financial advice. It is not tailored to the specific circumstances of any individual. Before acting on the information, you should consider whether it is appropriate for you, having regard to your objectives, financial situation and needs.