Here we explain the difference between secured and unsecured loans, and how security can save you money.
Did you know that Aussie partnered with Macquarie in 1994 to introduce the securitisation of home loans?
Securitisation works similarly to a secured loan, which involves using an asset to gain access to cheaper funding or interest rates. This literally changed the face of home lending in Australia, saving borrowers thousands of dollars by dramatically cutting down interest rates.
But what does security for loans mean for you as a borrower?
Put simply, secured loans involve the lender holding some kind of collateral, or security, to help protect its risk in case you don’t pay them back. This means you need to offer an asset with resale value to the lender, which will become collateral until the loan has been repaid. You don’t physically need to hand something over to your lender, but you need to sign the rights or ownership over.
Home loans are the perfect example of this, because the lender holds the title deed to your property, so if you default on your loan they can sell the property to recoup their loss. Secured car loans are another good example.
TIP! You may be able to get a secured personal loan for things other than what you’re spending the loan on. For example, you could get a holiday personal loan, wedding personal loan or even a loan to help you consolidate your debt but offset the lenders’ risk by offering up some collateral, e.g. a car, boat or caravan, valuable piece of jewellery, artwork, etc. The lender will then decide on a case by case basis if they will accept the security you have offered.
So while it’s clear how secured loans are beneficial to lenders, they can also work in your favour as the borrower. This is because secured loans are typically offered at a lower interest rate than unsecured loans, saving you money!
Beware though that if you fail to repay your loan, the lender is entitled to sell the personal property you provided as security to retrieve back the money you haven’t repaid.
Conversely with unsecured loans you don’t need to provide any security, so if you do fail to repay you won’t lose anything (except seriously damage your credit rating!). But this will mean that the lender’s risk is higher, and therefore so will be your interest rate.
When deciding which loan is best for you it’s important to consider your circumstances and what you are borrowing for. But mostly importantly, make sure you don’t borrow more money than you can comfortably afford to repay, so regardless of whether you have a secured loan or unsecured loan you won’t be caught out, lose a valuable item and impact your credit reputation.
Did you recently get a secured personal loan? What did you use for collateral?
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