Personal loans are no longer a one size fits all bank product. Today they come in many forms (e.g secured, unsecured, debt consolidation) to suit the needs of each individual borrower. With more choice than ever, if you find the right loan you could potentially save yourself big bucks in interest or even gain some much needed flexibility.
So if you've heard the term "secured" thrown around and are wondering what the deal is, our secured personal loans FAQ rundown will help break it down for you:
1. What is a secured personal loan?
Just like in a game of poker, with a secured loan (otherwise known as a collateral loan) if you have something to bring to the table like a car or property and use it as security for the loan you'll get dealt a better interest rate and lower fees.
Secured loans aren't only available for your current assets either, if you're taking out a loan to cover the cost of a car, that vehicle you're purchasing can also be used as security.
Plus you can use a secured loan to consolidate your current debt like credit card, store card or car loan debt into one easy to manage low rate loan. Find out more about debt consolidation here.
But if you don't have any assets to secure the loan with, then you'll need to look for an unsecured loan, which doesn't require security to take out the loan.
2. What are the pros and cons of secured loans?
Before you think, "yep a secured loan sounds awesome, where do I sign up?" make sure you factor in the pros and cons of a secured loan:
As mentioned above, the major benefit of securing your personal loan is more competitive interest rates and lower fees because the lender will consider you a less risky borrower.
Secured loans usually have higher borrowing limits and longer timeframes, as your assets assure the lender that you will do everything in your power to repay the loan to avoid losing your much loved possessions.
Taking out a secured loan can also be a good way to build up your credit score and show lenders that you're a prime candidate for future borrowing, if you pay your monthly repayments in full.
So far a secured loan may sound pretty tempting, but we should warn you if you find your repayment schedule is stretching your budget too far and you can no longer service the loan, the lender has the right to recover their losses through repossessing your car or even your home.
If you are getting the loan for a car most providers also require the car to be fairly new and you must hold a considerable amount of equity in your property to use these assets as security for the loan.
3. How much can I borrow?
You can avoid putting your assets at risk by making sure you can actually afford the amount you want to borrow.
For example, if you crunch the numbers and find you can only afford $500 coming out of your piggy bank each month, you'll need to make sure the total sum you take out and the timeframe of the loan will ensure you're not paying over that amount each month. You can work out how much you can afford to borrow by having a play with Mozo's repayments calculator here.
4. What should I look for in a secured personal loan?
When taking out a secured loan you'll usually be given the option to decide whether you want a variable rate that changes with the market or a fixed interest rate that is locked in for the life of your loan.
Variable rate: The benefit of a variable rate is generally lower rates and more flexible features like an extra repayments facility and redraw facility (see below).
Fixed rate: Whereas a fixed rate loan protects you against rate rises but may mean you forfeit these flexible features and you could incur a break cost fee if you try to pay out the loan early.
Comparison rate: And don't forget to check the distant cousin of the interest rate - the comparison rate, which takes into account both the interest rate and the fees to allow you to quickly compare loans. All lenders are required to publish the comparison rate, so that you can assess the full cost of the loan and not be swayed by a loan that has a low interest rate but high ongoing fees.
Other than interest rates, there are also a few features that could come in handy down the track:
Extra repayments: This feature could be your ticket to paying off your loan sooner, so make sure the secured loan you take out offers extra repayments without the slap of a fee. Say you borrow $20,000 with a 10% interest rate paid back over 3 years. By increasing your monthly repayments by just $100, you will save yourself nearly $500 in interest and shave 5 months off the life of your loan.
Redraw facility: Another handy option to have is the ability to withdraw any extra repayments you've made in the case of an emergency or hey maybe you just want to revamp your living space.
5. Do secured loans have fees?
Yep, here are some you may need to budget for:
Application fee: Some providers charge a one off fee, anywhere between $200-$500 for processing your application to cover costs like general administration and accessing your credit report.
Ongoing fee: Usually charged on a monthly basis, an ongoing fee will generally be much lower than the application fee, however keep in mind if you take out a loan over a long period it could end up costing you far more. For instance, over 10 years a $10 monthly fee will add up to a whopping $1,200.
Break cost fee: While exit fees on variable rate loans were banned in 2011, did you know you could still be charged for paying off your fixed rate loan early? So make sure you sign up with a loan that offers fee free extra repayments and doesn't charge a penalty for exiting your loan before the agreed timeframe.
Late payment fee: If you can't keep up with your ongoing repayments, you could be hit up with a late payment fee and the nasty thing about these fees is you'll continue to be charged until you are back on track with your repayments. So make sure before you take out a loan, you can reasonably afford the repayments by drawing up a budget.
6. How do I find the right personal loan for me?
Well, it depends on your circumstances. Here's the different options to help you find the best secured loan deal for your situation:
On the hunt for a new loan? Use our personal loan comparison tool, which covers hundreds of loans from Australia's biggest banks to the smaller lenders like credit unions and peer to peer players.
Are you interested in switching loans? Punch in your numbers into our Switch & Save Calculator to see the personal loans in Mozo's database that are offering a better deal than your current loan and see how much you could save by making the switch.
7. What do I need to know about my credit rating?
Your credit rating can be damaged without you even knowing it. For instance if you start applying for multiple loans in a short period of time each provider will run a credit check on you, leaving their fingerprint on your report and the more times providers run a credit check (or worse reject you for a loan) the worse your credit history will look.
So before you apply for a secured loan, we recommend you take the time to look up your credit report by visiting websites like mycreditfile.com.au and checkyourcredit.com.au and check if your credit report is actually correct, because if they've got you listed in the red, or some of your details are wrong then this could affect your chances of being approved for a loan.
Another reason you'll want to ensure your credit rating is in tip top shape is because some providers use a tier based pricing system, which means the better your credit rating the better the rate you'll be offered.
Does a secured loan get your tick of approval? Head up to the top of this page, to kick off your comparison!