Secured vs Unsecured Personal Loans: Which Is Right for You?

When shopping for a personal loan in Australia, one of the first decisions you'll face is whether to choose a secured or unsecured loan. This choice affects your interest rate, approval odds, and financial risk. Understanding the fundamental differences between these two loan types is essential for making an informed borrowing decision that aligns with your circumstances and goals.

What Is a Secured Personal Loan?

A secured personal loan is backed by collateral—an asset that you own and pledge to the lender as security for the loan. If you fail to repay the loan, the lender has the legal right to seize and sell the asset to recover their money.

In Australia, the most common form of collateral for personal loans is a vehicle. Car loans are almost always secured against the vehicle being purchased. However, other assets can also be used as security, including boats, caravans, motorcycles, or even term deposits.

Because the lender has this additional protection, secured loans typically come with lower interest rates. The lender's risk is reduced—if you default, they have recourse beyond simply pursuing you for the debt. This security translates directly into savings for borrowers who can provide appropriate collateral.

What Is an Unsecured Personal Loan?

An unsecured personal loan requires no collateral. The lender relies solely on your promise to repay, backed by your creditworthiness and income. If you default on an unsecured loan, the lender cannot automatically seize any of your assets (though they can pursue legal action and the debt will damage your credit score).

Because unsecured loans carry more risk for lenders, they typically come with higher interest rates. The lender needs to account for the possibility of non-payment without asset recovery. They also tend to have stricter approval criteria, with greater emphasis on your credit history and current income.

Unsecured loans are popular for purposes where no asset is being purchased—like holiday expenses, medical bills, home improvements, or debt consolidation—where there's nothing obvious to use as collateral.

Comparing Interest Rates

The interest rate difference between secured and unsecured loans can be substantial. As of late 2025, secured personal loans in Australia often start from around 5.5% to 7% for borrowers with excellent credit profiles, while unsecured loans typically start from 7% to 10% or higher.

On a $20,000 loan over five years, the difference between a 6% secured rate and a 9% unsecured rate amounts to approximately $1,600 in additional interest. That's a significant sum that could be saved or put toward other financial goals.

However, interest rates vary widely based on your personal circumstances. Use our personal loan calculator to compare the actual costs of different loan options based on the rates you're quoted.

Advantages of Secured Loans

Lower Interest Rates: The primary advantage is the potential for significantly lower interest rates, translating to real dollar savings over the loan term.

Higher Approval Chances: If your credit history isn't perfect, a secured loan may be easier to obtain. The collateral reduces the lender's risk, making them more willing to approve borrowers they might otherwise reject.

Larger Loan Amounts: Lenders may be willing to lend more money when a loan is secured, as their risk is capped by the value of the collateral.

Potentially Longer Terms: Secured loans sometimes offer longer repayment periods, which can lower monthly payments (though this increases total interest paid).

Disadvantages of Secured Loans

Risk of Asset Loss: The most significant downside is that you could lose your asset if you can't make repayments. Missing payments on a secured car loan could mean losing your vehicle.

Asset Requirements: You need to own a suitable asset to use as collateral. If you don't own a car or other valuable asset, this option isn't available to you.

Restrictions on the Asset: While the loan is active, there may be restrictions on selling or modifying the secured asset. You'll also need to maintain appropriate insurance.

Potentially More Paperwork: Secured loans often require additional documentation, including proof of ownership and valuation of the asset.

Advantages of Unsecured Loans

No Asset at Risk: Your property remains protected regardless of loan performance. While default still has serious consequences for your credit and finances, you won't lose a specific asset.

Flexibility: Unsecured loans can be used for any purpose, with no restrictions tied to the nature of collateral.

Simpler Application: Without asset valuation and registration requirements, unsecured loan applications are often faster and simpler.

No Collateral Required: Ideal for those who don't own suitable assets or prefer not to put them at risk.

Disadvantages of Unsecured Loans

Higher Interest Rates: The trade-off for not providing collateral is paying more in interest over the loan term.

Stricter Approval Criteria: Lenders rely heavily on your credit score and income, making approval harder for those with less-than-perfect credit histories.

Lower Borrowing Limits: Without collateral, lenders may cap how much they're willing to lend you.

Which Should You Choose?

The right choice depends on your individual circumstances:

Choose a secured loan if: You're purchasing an asset like a car that can serve as collateral, you want the lowest possible interest rate, your credit history isn't perfect but you have valuable assets, or you need to borrow a larger amount.

Choose an unsecured loan if: You don't have suitable assets or don't want to risk them, you're borrowing for purposes without an associated asset (like a holiday or wedding), you value simplicity and speed in the application process, or you have excellent credit and can qualify for competitive unsecured rates.

Sometimes the choice is clear-cut—if you're buying a car, a secured car loan makes obvious sense. Other times, you'll need to weigh the interest savings against the risk to your assets.

Calculate Your Options

Before making a decision, get quotes for both secured and unsecured options if applicable to your situation. Use our personal loan calculator to compare the monthly payments and total costs for each scenario. The right choice is the one that balances your need for lower costs with your comfort level regarding asset risk.