Car and personal loans
What is the difference between secured and unsecured loans?
When you borrow money (or take out finance), you will need to repay the loan, along with an extra amount for interest on top. This might be in regular payments each month, or as a single payment when the loan is due to be repaid. If you miss a payment or default on repaying the loan, the credit provider can take steps to recover what you owe them as a debt.
A secured loan is where you offer the lender something as collateral for repaying the loan. Collateral is like security for the loan. If you don't repay the loan, the lender can take possession of the collateral and sell it to try and recover some of the debt. Most of the time, the asset you are buying will be used as collateral. This gives the credit provider security to help protect themselves in case you are unable to repay the loan.
If they sell the collateral for less than what you owe them, you will still have to repay the difference. The credit provider might have to take you to court to recover the outstanding debt.
An unsecured loan does not involve any collateral. If you default, the credit provider will need to get a court order before it can take any steps to take and sell any assets you might have.
Because unsecured loans have more risk for lenders, they can be harder to get and may have a higher interest rate compared to secured loans.
What should you consider before taking out a loan or finance?
- What is the interest rate? Higher interest rates can significantly increase your repayments.
- What are the repayments? Can you afford them? Do a budget to work out how much you can afford.
- Is the interest rate fixed or variable? A fixed interest rate provides certainty of repayments. A variable interest rate will provide more flexibility.
- Is there a 'balloon payment'? A balloon payment is a large repayment due at the end of the loan and is additional to your regular payments. They are used to make the loan appear more affordable. You may be forced to take out another loan, just to pay the balloon payment.
- What is the length of the loan? Car and personal loans are generally for a period of 2 – 7 years. Payday loans can be for a few weeks or months. Repaying a loan quicker will involve higher repayments, but you will reduce the amount of interest you will have to pay across the loan.
- What happens if you miss a repayment? How long do you have to fix the situation? Do they charge fees or extra interest if you default?
- What is the total cost of the loan? Add up all the fees, charges, and interest.
What if you are having problems getting a personal loan?
Credit providers have different lending criteria, and you may qualify for a loan with one and not another. Reasons may include that you don't have enough income to make repayments on the loan (as well as paying all your regular expenses), insecure employment, or problems with your credit history. If you have been rejected for a loan, ask the credit provider why you did not qualify. If it is because of:
- your income or employment, you may have to wait until you earn more, have more savings, or have been in your job for longer.
- negative information on your credit report, the lender must tell you.
How can you check if what you are buying is already under finance?
If you are buying something second-hand, like a car or boat, it might have been used by the seller (or a previous owner) as security for a loan. If they loan has not been repaid, the credit provider can still seize the asset if the borrower defaults, even after it has been sold to someone else (you!).
You can check the Personal Property Securities Register before you buy personal property to see if it has already been bought under finance, written off, reported stolen or used as a security interest. This is a national register and covers certain types of valuable second-hand property worth over $5,000 (but not real estate).
You should also check the Register if you are buying something from a private seller, who doesn't normally buy and sell things as part of a business.
A small fee is charged to check the Register.
- Consumer Credit Law Service WA - Payday loans
- The Personal Property Securities Register website has more information on why and how to check the register.
Reviewed: 11 December 2023