Lending money can be risky for financial institutions, because they can never be certain that borrowers will repay the funds.
Cue: secured loans. These loans require borrowers to offer up some collateral - usually an asset - as security for a loan, and in the event that they can’t meet their loan repayments, the lender can take possession of the asset and sell it to recoup their funds.
With a home loan, your home is generally used as security for the loan. If you can’t meet your mortgage repayments, the bank may seize your property and sell it to recover the loan amount.
It’s the same deal with secured car loans. If you can’t meet the repayments on your car loan, the bank can repossess your car to recoup its losses.
You can think of secured loans like protection for the lenders. It’s how they ensure that should borrowers be unable to meet their repayments, they won’t lose out.
How do secured loans work?
Just like any loan, you’ll likely need to meet some eligibility criteria.
At SocietyOne, that means:
- You need to be at least 18 years of age
- You must be an Australian citizen or a permanent resident of Australia
- You must earn more than $30,000 per annum (with Centrelink considered to be a supplementary form of income)
- You must have a good credit score
The asset that will be used as security for the loan will normally be built into the terms of your contract with your lender. If you meet your loan repayments, your collateral - or your asset - remains yours.
If you default on your repayments, the lender has a right to repossess your asset. But it might not always be that black and white. If you’re a few days - or weeks - late on a repayment, the lender may not repossess your asset immediately. Instead, it might trigger a late fee, or a default notice.
Be sure to check the terms of your arrangement carefully, and find out exactly how long it is before your lender makes a move to recoup their funds.
What kinds of things can be used as security?
We’ve talked about cars and houses being used as security for a loan, but collateral can also be things like:
- Cash in a savings account
- A term deposit
- Jewellery or collectibles.
Will defaulting on my secured loan affect my credit score?
Yes, it will.
Defaulting on a secured loan is just like defaulting on any loan repayment, which means it will be recorded on your credit report and can affect your credit score for up to 7 years.
What’s the difference between a secured loan and an unsecured loan?
Unsecured loans don’t require borrowers to offer up collateral - or an asset - to borrow funds from a lender.
This means if you opt for an unsecured car loan, and you can’t meet your repayments, the lender can’t just seize your car to recoup the funds. Instead, they may need to take you to court to get their money back.
However, because these kinds of loans aren’t backed by collateral, they tend to carry a higher risk than secured loans. This means lenders may offer higher interest rates and fees, and be pickier with who they lend to.
Who are secured loans right for?
Because secured loans are backed by collateral, lenders tend to be a little more lenient with who they lend to. This means if your credit score has taken a few hits, or isn’t squeaky clean, you may be more likely to be approved for a secured loan than a different loan.
What’s more, the interest rate tends to be fixed, which means if you like to stick to budgets and know exactly what payments are coming up when, then they might be a good option for you.
In short, secured loans:
- Are less risky for lenders, so you may have lower interest rates and lower fees
- Generally have higher loan amounts, for longer terms
- Are easier to qualify for if you have a not-so-great credit history
- Offer fixed interest rates, so you can have certainty of repayments.