Secured vs Unsecured Loans for Home Renovations

According to the ABS, almost 1 in every 2 Australian homeowners (48%) have renovated their home in the past five years. This was especially so during the COVID-19 pandemic when we spent even more time at home than usual.

Home renovations have become increasingly popular for good reason. It’s one of the main ways that we make our living spaces more comfortable, customised, and in line with ideal style. Following this rise in demand, the cost of home renovations has also skyrocketed, putting the median amount of money spent on a home reno at a whopping $30,000.

So, you’ve got the Pinterest board, you’ve got your plans, and now you’re wondering how on earth you’re going to get the funds for a home renovation. We’re here to enlighten you on two ways to do so: secured loans and unsecured loans.  

Understanding Secured Loans

What are Secured Loans?

Secured loans involve the use of another item of value you own as collateral, thereby ‘securing’ the loan. In applying for a secured loan, you will be required to list an asset (or several) to guarantee the loan.

Need some examples? Here are some high-value items that lenders usually accept:

• Vehicles (cars, boats)
• Property
• Jewellery
• Pieces of art

Taking on a secured loan means that you agree that if you are unable to repay the loan for any reason, the lender will get to take the assets that you have provided.

Advantages of Secured Loans

• Lower interest rate: One of the main benefits of taking a secured loan is the lower interest rate. The cost of interest can add up quickly, especially over long repayment periods. Having a lower interest rate is preferable and helps you save on the additional cost when paying back the loan.
  
  
• Higher loan amount: The asset(s) you offer as security for the loan give lenders more assurance, making them feel more comfortable lending bigger amounts to you. Considering the high costs of home renovation, having more funds is favourable.
  
  
• Longer repayment terms: Secured loans also tend to have longer repayment terms, which breaks up your borrowed amount into smaller, more manageable repayments, reducing the stress on your finances.

Considerations for Secured Loans

• Risk of losing the collateral: As mentioned earlier, one of the main drawbacks of secured loans is the risk of losing the asset(s) you have put up as collateral if you default on your loan.
• Longer approval process: Applying and getting approved for a secured loan takes longer, with more documents required. Lenders also often require an evaluation of your collateral to ensure its value, which adds more time to the process.

Understanding Unsecured Loans

What are Unsecured Loans?

Unlike secured loans, an unsecured loan doesn’t require any assets for collateral. Instead of using collateral as protection, lenders look at your credit score, current debt, and income. These factors inform them of your ability to repay the loan as well as how much you will be able to borrow.

There’s more. Unsecured loans can also be used for virtually anything: car purchases, overseas holidays, and even wedding expenses. This lack of restriction makes unsecured loans much more flexible in the ways they can be used.

Advantages of Unsecured Loans

• No risk of losing collateral: No collateral is needed for this loan, so you won’t have to worry about losing any assets if you default on it. A word of warning, however: Defaulting on this type of loan will affect your credit rating, which undermines your chances of taking out future loans.
  
  
• Faster approval process: The approval process is much quicker for an unsecured loan, which makes it ideal for situations where you require funds on short notice.

Considerations for Unsecured Loans

• Higher interest rates: With no assets to secure the loan, lenders usually perceive more risk for unsecured loans, leading to higher interest rates. Depending on how much you borrow, you could accrue a significant cost in interest payments.
• Smaller loan amounts: Lenders are less likely to offer you a large borrowing amount on unsecured loans due to the lack of collateral for security.
  
  
• Shorter repayment term: It’s common for unsecured loans to have a shorter repayment term. Lenders want to get their money back as quickly as possible, so you may end up having to make bigger repayments, putting a strain on your financial fluidity.

If you already have an existing home loan, and you take out an unsecured personal loan, and if the renovations are structural, you may need permission from your existing home loan lender before conducting any construction. This is because you are modifying the lender’s security, and it is highly likely your loan contract has a clause in the contract that requires you to notify the lender if you are planning to modify the lender’s security interests.

Securing The Right Home Loan

So which type of loan is better, secured or unsecured? It depends on your home renovation needs. If you are carrying out a major renovation involving multiple rooms, you will probably need a bigger loan to fund the renovation cost, which makes a secured loan ideal. A smaller project would require fewer funds and thus be better suited for an unsecured loan.

It’s never a bad idea to take the time to review the estimated cost of your renovation project first. We recommend consulting a financial professional that you trust to provide the full picture of which loan will best meet your needs.

As the leading financial services provider in Australia, Credit One understands the importance of making well-informed decisions for any home renovation project. Our professional team is always ready to assist you; just give us a call today to secure the right personal loan for your new renos!