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What Is The Difference Between Secured And Unsecured Loans?

January 28, 2021   Daniel KatzPhilip Evangelou

When taking out a loan, it can either be secured or unsecured. In essence, the difference lies in the nature of the security that the lender requires.

This article will explain the difference between secured and unsecured loans, and what may be best for you.

What is the difference?

A secured loan is one that is tied to a piece of collateral, normally in the form of a car or a house. Here, if the borrower defaults, the bank takes possession of the collateral.  

On the other hand, unsecured loans are not connected to any form of physical security. Rather, lenders will rely on the strength of your business cash flow as security. 

Here are a few different characteristics of each loan:

Unsecured LoanSecured Loan
Strength of your cash flow and income is commonly used as security. Longer approval processes.
Higher interest ratesThe borrower can borrow against an asset. This means that the lender is guaranteed compensation if the borrower defaults.
Generally used for borrowing smaller amounts. For example, credit cards and bank overdrafts.Can normally borrow higher amounts.
Available to borrowers with below-average or poor credit records. These individuals or entities may be charged higher interest rates.Lower interest rates.
Short term repayment periods.Long term repayment periods.

Which loan is right for you?

Deciding which loan is right for you is completely situational. If you wish to take a loan out to pay for a house or car, then a secured loan is likely to be best for you. However, if you need a credit card or overdraft to help out your business, then an unsecured loan would be the best avenue. It is always advised that you contact a bank or legal team for advice when deciding to take out a loan.

If you need any assistance, our commercial lawyers are here to help! Just contact us at 1300 997 337 or fill in the contact form on this page.

About Daniel Katz

Daniel KatzDaniel is a legal intern at OpenLegal, placed in our legal content team. He is currently studying a Bachelor of Laws at the University of Technology Sydney. Daniel's interest lies in economics and media/startup law.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.