You may need a personal loan for a variety of reasons. Whether it’s for renovations or an expensive dental visit, a personal loan can come in handy when you need cash fast. When it comes to personal loans, you typically have two options: secured or unsecured.

Let’s discuss what a secured personal loan is, the pros and cons, costs and more.

What is a Secured Personal Loan?

A personal loan is essentially a personal loan. While an auto loan must be used to buy a car, a personal loan can be used for anything from paying for a vacation abroad to renovating a home.

ONE secured With a personal loan, you must use an asset, such as your car or a time deposit, as collateral for the loan. This acts as a security blanket for the lender so that if you are unable to repay your loan, they can use your assets to make up any losses. Usually, if you want to borrow a large sum of money, you need to take out a secured personal loan because lenders like to have that security.

Secured personal loans can also come with lower interest rates than unsecured loans because of the added security. With this in mind, the lender can have more confidence that you will repay your loan and, if not, that they will not pay too much out of pocket.

Pros and cons of secured personal loans

There are a number of pros and cons that should be considered when considering whether to take out a secured personal loan.

benefits

• Often low interest rate: Secured personal loans often have lower interest rates than unsecured loans because there is less risk of loss for the lender
• You can borrow more: A secured personal loan usually allows you to borrow more
• Less Fees: You may also find that secured personal loans have fewer or no fees compared to unsecured personal loans

disadvantage

• Your fortune is at stake: The biggest obvious downside to secured personal loans is that you could lose your assets if you can’t make your repayments
• Asset Requirements: Depending on what you want to use as collateral, there may be specific requirements from your lender. For example, if you’re using a car as collateral, it may need to be relatively new or worth a certain amount of money
• Less flexibility: Secured personal loans are generally pretty strict about what you use the funds for. For example, if you took out the loan to renovate your home, but it ended up costing less than you thought, you can’t just take a vacation with the rest.

Secured vs. unsecured personal loans

Before you decide if a secured personal loan is right for you, it may help to compare the pair: secured and unsecured personal loans. Since these are going to be your two main options, it can help to know the differences and which ones may be most helpful for your situation.

From this quick comparison, you can see that secured personal loans are better suited for large, one-off purchases — such as B. the installation of a back deck or the cost of cosmetic surgery. By knowing exactly how much the goods or services cost, you are left with neither too much nor too little.

Whereas an unsecured personal loan may be more appropriate for a smaller project, like a quick kitchen makeover or a vacation abroad. That way, if money is left over after funding your personal endeavor, you can just spend it on whatever you want.

Interest Rates for Secured Personal Loans: Fixed vs. Floating

More on secured personal loans and their “lower” interest rates: You typically get two interest rate options: a fixed rate or an adjustable rate.

Fixed interest rates are generally slightly higher than variable interest rates, but once you have your interest rate, it stays the same throughout the life of your loan. This means you know exactly what your monthly repayments are and how much interest you will be paying back in total. This can be useful for budgeting and planning purposes.

On the other hand, variable interest rates are usually slightly lower than the fixed interest rates available. However, variable interest rates are subject to change over the life of your loan based on cash rate/market activity. While it may start out lower than a fixed rate, if interest rates rise, you could end up paying more. But when interest rates fall, you pay even less than the starting interest rate. It can be a little less predictable than a fixed-rate personal loan because you don’t know exactly how much you’ll pay back in interest.