A secured consolidation loan uses an asset as security. If you don't repay the loan, the lender may be able to take and sell that asset. An unsecured consolidation loan does not use an asset as security, however its interest rate may be higher.
Secured or unsecured debt consolidation: what changes?
Debt consolidation can combine several balances into one loan. That loan can be secured or unsecured, and the difference goes beyond the interest rate.
With a secured loan, you offer an asset that the lender may be able to take and sell if you don't repay the debt. With an unsecured loan, you don't offer that security, however the lender can still take recovery or legal action if repayments are missed.
If the secured option has a lower rate, compare the difference in cost with the risk attached to your home, car or another asset.
A secured consolidation loan is backed by an asset. The asset and the lender's rights should be set out in the credit contract.
A car can secure some personal loans. A home loan refinance may also be used to pay out unsecured debts, which moves those debts into lending secured against the property. The exact products and accepted uses depend on the provider.
Security may help a lender offer a lower interest rate because it has an asset to recover against if the loan isn't repaid. However, debts that previously put no specific asset at risk may now be secured against your home, car or another asset. Make sure that change is clear when you compare the repayments.
Before considering a secured option, ask:
If the security is a jointly owned home or car, the decision also affects the other owner. Get legal or financial advice if you are unsure what rights are being granted over the asset.
An unsecured consolidation loan does not use a particular asset as security. Credit cards and many personal loans are unsecured.
The rate can be higher than a secured loan, and the amount or term available may be different. The lender still assesses whether the loan is suitable and affordable at the time you apply. Missing repayments can lead to fees, credit-report consequences, collection activity or legal action.
An unsecured loan may make sense when protecting the asset matters more to you than receiving a lower rate. It can also be a more direct comparison when the debts being paid out are already unsecured.
An unsecured option can still worsen your position if the repayment is too high, the term is too long or the rate is expensive. Compare the terms of the actual offer as well as whether the loan is secured.
Suppose $20,000 is consolidated over 3 years (illustrative). At 9.99%, the repayment is about $645 a month and total interest is around $3,229. At 13.99%, the repayment is about $683 a month and total interest is around $4,604. Fees are excluded.
| $20,000 over 3 years (illustrative) | Lower-rate secured example | Higher-rate unsecured example |
|---|---|---|
| Interest rate | 9.99% | 13.99% |
| Monthly repayment | ~$645 | ~$683 |
| Total interest | ~$3,229 | ~$4,604 |
| Specific asset at risk | Yes | No |
The difference in this example is about $38 a month and $1,375 in interest over 3 years. The secured option costs less, however you still need to name the asset at risk, understand the contract and include all fees before comparing actual offers.
Extending either loan to 5 years would lower the monthly repayment, however you would pay interest for longer. A lower repayment may help when cash flow is the immediate problem, however it doesn't mean the loan is cheaper overall.
Compare secured and unsecured offers with the debts you have now in the debt consolidation offer comparison tool. You'll see the monthly repayment, total cost, term and asset used as security on separate lines.
Check rates, fees, repayments, terms and estimated total cost.
Try the calculatorUsing home equity to pay out credit cards can give you a much lower rate, however a home loan can run for decades. If you repay the credit card amount over the remaining mortgage term, you may still pay substantial interest because the debt stays open for much longer.
It also moves the consequence of missed repayments. Credit card debt does not give the provider a mortgage over your home. Once that amount becomes part of lending secured against the property, the home is connected to the repayment obligation.
If a mortgage-based option is being considered, model the consolidated amount over a short repayment schedule as well as the full home-loan term. Ask whether you can keep that portion separate, repay it faster and make extra repayments without penalty. Mortgage refinancing can bring valuation, legal, discharge and application costs that do not appear in the headline rate.
Whether the new loan is secured or unsecured, confirm that every nominated debt was paid out. A consolidation loan does not automatically close old credit cards or buy now pay later accounts.
Check the balance on each old account, redirect recurring payments, request closure where appropriate and keep the confirmation. If you retain a credit card for a specific emergency purpose, reduce the limit to match that purpose and decide how it will be used. An open limit with no specific restrictions can allow balances to rebuild while you are repaying the new loan.
Install WeMoney and connect your accounts before comparing secured and unsecured consolidation. You can see your debts, balances and repayments beside your income and spending, which makes it easier to understand the full financial picture and the repayment any new loan would need to fit.
WeMoney uses your connected accounts and credit information to show personalised savings opportunities in the For You section. Debt-consolidation, credit-card payoff or refinancing opportunities may appear where they are relevant to your position. Open the app to see your personalised opportunities, then compare any offer with the cost and asset risk explained above. Potential savings and approval are not guaranteed.
Whether consolidating suits your situation at all, secured or not, is worked through in is debt consolidation a good idea.
If you are already missing repayments or using credit for essentials, speak with the existing providers about hardship support. A secured loan can make the consequences of an unaffordable plan more serious.
The National Debt Helpline on 1800 007 007 provides free financial counselling. A financial counsellor can help compare the debts, the asset risk and the alternatives without selling you a loan.
This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.
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