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Why Secured Loans Are Important For Borrowers And Lenders
●May 24, 2021●3 minute read
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Secured loans can be handy for people that wish to borrow large amounts of money but they can also benefit lenders. Secured loans help mitigate the risk of lending high amounts of money to borrowers.
Let’s dive into secured loans, what they mean, and how they help both borrowers and lenders.
What is a secured loan?
A secured loan involves the borrower offering an asset to be used as collateral against the loan. This means that if the borrower was unable to repay their debt, the lender could repossess the asset to recover their losses. Secured loans are typically offered for higher loan amounts (e.g. above $2,000) to minimise the risk imposed on the lender.
There are multiple types of secured loans including a mortgage loan, car loan, and secured personal loan:
- Mortgage loan: is a secured loan because if the borrower is unable to make their repayments, the house they purchased can go into foreclosure
- Car loan: works in a similar way to a mortgage, with the car purchased serving as the collateral
- Secured personal loan: requires the borrower to offer an asset that they own for the lender to use as security. This can be almost anything from a motorbike to a boat.
Why do lenders offer secured loans?
When lenders approve a loan for a large amount, such as $10,000, there is a much higher risk involved than lending an amount of $500. By offering secured loans, lenders can mitigate some of the risk of the borrower not being able to repay their loan.
Attaching an asset as security is not only a financial safety net, in the event the borrower can’t pay off their loan, but also a gesture of commitment. It demonstrates that a person is genuinely intent on repaying their loan, as not doing so will result in them losing their asset.
What are the benefits of secured loans?
There are a few key benefits of secured loans compared to unsecured loans (which don’t require an asset as collateral):
Lower interest rates
Since there is less risk involved for the lender, they are typically able to offer lower interest rates than unsecured loans. There are also usually fewer or lower fees associated with secured loans.
People with bad credit
Having bad credit history means that you can be considered a high risk borrower. Attaching an asset as security can make it easier to find loan approval if you have bad credit as there is less risk for the lender.
People who work casual, part-time, or are self-employed
If you work as a casual, part-time, or are self-employed, you can be considered a higher risk borrower than someone who is employed full-time. This is because income is considered in a person’s application and these income streams can be considered less reliable than a full-time wage. Having an asset attached as collateral can make it easier to find approval for people that don’t work full-time.
Generally, you have more time to pay off your loan if it is secured. This is because the loan amount is generally higher than an unsecured loan and, therefore, you have a longer time frame to repay your debt.
Pros and cons of secured loans
To sum up what we’ve discussed so far, here are some of the pros and cons of secured loans:
|Lower interest rates and fees.
||You need to have an asset of value to offer.
||You risk losing your asset if you cannot repay your loan.
|Improve chances of loan approval.
||Loan amount is tied to your asset’s value.
When can a lender repossess an asset?
Repossession of an asset attached to a secured loan is usually the last resort for a lender. A lender can only repossess an asset if certain conditions are met, including:
- You’re behind on your loan repayments;
- They have sent you a notice asking you to repay your loan within 30 days;
- You have not paid, organised to pay, or asked to postpone repossession since those 30 days have passed.
However, a lender is not able to repossess an asset without a court order under the following two conditions: you owe less than $10,000, or less than 25% of the loan.
Why secured loans are important for borrowers and lenders
Generally, secured loans are the norm for high loan amounts as they lower the risk for the lender. Unsecured loans for large amounts typically come with higher interest rates and fees due to the risk imposed on the lender.
Secured loans allow lenders to offer better rates and provide more flexibility to borrowers, as they’re able to reap the benefits of the lender’s reduced risk. Without secured loans, many lenders would be unable to risk lending high amounts to borrowers, which would make access to finance much more difficult.
Overall, secured loans allow lenders to provide borrowers access to high loan amounts with less risk.
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Written by Rachel Horan
Rachel Horan is a Content Writer for Jacaranda Finance. Rachel has previously produced content for Brisbane City Council, Black & White Cabs, and Clubs Queensland. She has a Bachelor of Mass Communication with Distinction from the Queensland University of Technology.