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What is the difference between a secured and unsecured loan? [Video]

14 January 2016

The distinction between and a secured and unsecured loan is a simple one.

In the case of a secured loan, the borrower is required to offer the lender some form of collateral against the loan. The title deed for a house is a good example of such collateral.

By contrast, in the case of an unsecured loan no such collateral is required.

The application process for an unsecured loan is fairly quick as there is less paperwork involved.

Anyone from homeowners and non-property owners can apply for an unsecured loan. Institutions do usually require proof of a regular minimum income, as well as clear credit references, and applicants must be 18 years of age or older.

A Direct Axis Personal Loan, for example, is an unsecured loan that you can pay back over a repayment term of between 2 to 6 years. You can choose the loan amount that suits you, from R4 000 up to R150 000 (in increments of R1 000). If approved the money will be speedily deposited directly into your bank account.

Of course, you are free to use the money however you like – make those home renovations, pay for your child's education, consolidate your retail accounts and more!

Secured loans involve the lender holding the title or deed to the collateral until the loan is paid off in full. Should the borrower fail to pay off the loan, the lender has the right to take possession of the collateral and sell it to pay the outstanding loan balance.

There are several advantages of secured loans. Because of the collateral, the lender faces less risk and the amount you can borrow is often higher than is the case with an unsecured loan. You may also have a longer period in which to pay back the loan and interest rates can be lower.

It is also worth remembering that a secured loan can be secured against the equity in a property, whether it is bonded or not.

However, the requirement for collateral puts secured loans out of the reach of many people, while another thing to consider is that the application process is likely to take longer because there is more paperwork involved.