A secured loan is one that is given out against an asset of the borrower. The asset acts as a security against the loan amount, protecting the lender in case the borrower fails to repay the loan. A secured loan can be given out against an asset that the borrower intends to purchase with the loan amount or an existing asset of the borrower.
The most common type of a secured loan is a car loan, as the lender retains ownership of the car being bought with the loan amount for the duration of the loan term. However, lenders may accept any kind of asset provided its value matches or exceeds the value of the loan amount. These assets can be vehicles, home equity, jewelry, or monetary accounts, to name a few. The lender defines the assets that it considers valid against its secured loan.
Tip: Many lenders in Australia are willing to give out secured loans of up to $100,000 for a loan term of up to 7 years as a secured loan.
Should You Opt For A Secured Loan?
There are a few factors you need to consider before applying for a secured loan. Although it may be the best loan option for some, it might not suit your particular needs and circumstances. You should consider the following points to help you figure out whether a secured loan is the right option for you at this time.
Usually A Cheaper Option
Since the lender has already covered most or all of the risk associated with a secured loan, as it can easily sell your asset to recover some or all of the loan amount in case you default on the loan, hence, the lender is able to offer you a cheaper rate compared to an unsecured loan.
Applicants With Bad Credit History May Be Accepted
Lenders providing an unsecured personal loan may be skeptical about providing a loan to someone with a bad credit record since the associated risk is too high. However, as you would be covering most or all of the risk taken by the lender with a secured loan, by offering your asset as collateral, the lender may be willing to ignore the negatives on your credit history and offer you a secured loan.
Your Loan Purpose
If the reason you are acquiring a loan is that you need to purchase an asset, then you need to check if lenders are willing to offer you a secured loan by keeping that asset as collateral. However, if you are not going to buy an asset, and also don’t own an asset that can be kept as collateral by the lender, then you will not qualify for a secured loan.
Consider The Risk
Although the risk for the lender is lower with a secured loan, the risk for the borrower is very high. In case you default on a secured loan, the asset you have kept as collateral would likely be seized by the lender and sold to recover the loan amount. You will not only lose your assets but also damage your credit score.
Tip: Make sure you are fully capable of making loan repayments on a secured loan before opting for one.
Is Your Asset Accepted By Lenders?
Not all assets are accepted by secured loan providers as collateral. Most lenders have conditions in place which specify the type, age, and condition of assets that may be accepted as collateral against a secured loan.
Tip: Make sure you have a suitable asset before applying for a secured loan.
Comparing Secured Loans: Finding The Best Option
You need to check the various secured loan options available in the market based upon the following criteria:
- Loan amount – check whether your chosen lender is offering the loan amount that you require.
- Loan terms – secured loans are usually offered for a loan term between 1-7 years, however, some lenders may offer a shorter time period. Pick one that suits your affordability.
- Acceptable assets – every lender has unique asset criteria that define assets that may be used as collateral for a secured loan.
- Fees – in Australia, lenders usually quote a comparison rate that is comparable between multiple lenders to make selection much easier. However, you should also check the total amount you would ultimately need to repay on a secured loan, which includes all upfront and monthly fees as well. Also, other fees such as early repayment fees, late payment fees, or arrears fees should also influence your selection process.
- Repayment frequency – Most lenders offer borrowers the option to repay on a weekly, fortnightly, or monthly basis, however, some offer more repayment flexibility than others. Select a lender that fits with your income schedule.
Advantages and Disadvantages
The following table outlines the advantages and disadvantages of obtaining secured loans.
|A lower rate compared to unsecured personal loans||You risk losing your asset in case you default on the loan|
|Offers the flexibility of using the loan for any personal expense||The lender will usually not approve an amount that exceeds the value of the asset kept as collateral against the loan|
|Getting approved for a secured loan with an acceptable asset is easier than an unsecured loan, especially for those with a bad credit history|
Some Popular Secured Loan Options
In Australia, the following options are available as secured loans.
Borrowers can opt for car loans to purchase a car that is either new or used. Rates can vary between 2%-14% per annum, depending upon the loan provider and type of loan.
Home Equity Loans
A home equity loan is available for borrowers who are willing to pledge the equity of their home against a loan. This loan can be used to pay for any personal expenses such as home renovation, a holiday, to buy a car, or to invest in property.
Term Deposit Loans
Usually, customers who maintain a term deposit with a financial service provider are given the option to take out a secured loan by keeping that same deposit as collateral.
Personal Asset Loans
This type of secured loan accepts assets held by the borrower as collateral, as long as it fulfills the lender’s specified criteria.
Are secured loans always the cheapest loan option?
Not necessarily. Some borrowers with an excellent credit history may be able to get a cheaper rate with an unsecured loan, depending upon the lender and the loan product.
Will I lose my asset if I default on a secured loan?
Yes, the lender will likely sell off your asset to recover some or all of the loan amount in case of a default on the loan.
Can I get my asset back after it has been repossessed by the lender?
Depending on the terms and conditions of the loan, lenders usually offer a 21-day repayment period to borrowers after repossessing an asset. If you repay all due payments including any repossession charges, your asset would be returned to you.
Can I make early repayments on a secured loan?
Most lenders allow early repayments on secured loans, however, some lenders have early repayments charges.