All personal loans will fall into one of two categories, being unsecured personal loans and secured personal loans.
A secured personal loan is one that is secured by an asset. Often the asset will be the item which the loan is used to purchase, such as a new car, however this isn’t always the case.
How a secured personal loan works
When a bank or lender issues you with a secured personal loan, they will first take security over one or more of your assets. In most cases this asset will be the one purchased using the funds from the loan.
The loan contract for a secured loan will specify the secured asset, and will state that the bank or lender has the legal right to take possession of the asset if you default on your personal loan repayments.
If you fall behind on your loan repayments and do not make suitable arrangements with the lender to repay your loan, they will have the legal right to take possession and sell the asset in order to clear your outstanding loan balance.
Examples of secured personal loans
The most common example of a secured personal loan is one that is used to purchase a motor vehicle. They are also used to purchase other valuable assets such as boats, caravans and even business equipment.
Secured personal loans are generally not provided for assets of limited value, as the asset needs to worth enough to justify the costs of repossessing and selling the item.
When it comes to vehicles, generally a secured loan will only be given when the vehicle is younger than a certain age or worth more than a certain value. The age and value restrictions can vary greatly depending on the institution providing the loan.
Although not a personal loan, another common example of a
secured loan is a home loan .
Benefits of secured personal loans
Because the bank can take possession of the asset securing a secured personal loan and can then sell that item to cover the outstanding loan balance, a secured personal loan is generally seen as a lower risk option for the bank than an unsecured personal loan.
Thanks to the reduced risks, banks and other lenders will generally be willing to offer a reduced interest rate on secured personal loans, which means less money out of your pocket.
Secured personal loans can sometimes be easier to obtain, especially when applying for larger loan amounts. This is also a result of the lower risk perceived by the bank or lender.
What to look for when choosing a secured loan
The factors to consider when choosing a secured personal loan are similar to those considered when choosing any other type of loan.
The loan should provide a combination of a low interest rate and ongoing fees, and should also give you the flexibility to pay weekly or fortnightly. It should allow you to make additional lump sum repayments at any time, and should also allow you to repay the loan early without incurring any excessive break costs.
Who offers secured personal loans?
Secured personal loans are offered by all banks, credit unions and building societies, and are also offered by many smaller finance companies. With car loans being the most common form of secured personal loan, car finance companies are also large issuers of these loans.
Although secured personal loans are offered by many different types of institutions, it is important to consider all possible options before making a decision. Many car dealerships will offer you their own finance, but you should compare their offer with others to ensure you are receiving the best value for money.