What is a Secured Loan?
Most of us will need to take out a loan at some point. With so many different types of finance available in Australia it can be hard to know what is the best option for you. Secured loans are one of the most common types of loans on offer. But what is a secured loan and how does it work? Find out below.
- Secured loan definition
- Difference between secured and unsecured loans
- How secured loans work
- What can a secured loan be used for?
- Key features of secured loans
- Popular types of secured loans
- Advantages and disadvantages of secured loans
- Is a secured loan a good idea?
- Need a secured loan for bad credit?
Secured loan definition
A secured loan is a type of loan that is backed by collateral, typically an asset that you (the borrower) own. This collateral serves as a security for the lender, providing a guarantee that if you default on the loan, the lender can seize the collateral to recover the outstanding amount. Common examples of assets used as collateral include real estate, vehicles, or valuable personal property.
Difference between secured and unsecured loans
The key difference between secured and unsecured loans is whether any collateral is required. Secured loans require collateral whereas unsecured loans do not.
Can a secured loan become unsecured?
It may be possible to refinance your secured loan as an unsecured loan. You would need to use a lender who offers unsecured loans and meet their eligibility and lending requirements. This could end up costing more than you think. So make sure it is financially worth it by weighing up the costs involved with refinancing to a new unsecured loan.
How secured loans work
Unlike unsecured loans, which are not backed by collateral, secured loans offer lenders a layer of protection. The collateral reduces the risk for lenders, making them more willing to extend larger loan amounts and offer more favourable interest rates. In the event of default, the lender can sell the collateral to recover the outstanding balance.
Does a secured loan hurt your credit?
A secured loan can help to improve your credit score or can hurt it. The outcome depends on what type of secured loan you get, who your lender is, and how you manage your debt. If you make payments on time with a lender that reports the information to an Australian credit bureau, then it will help your credit improve over time.
Find out more: What Is A Good Credit Score & How Can You Improve It?
What can a secured loan be used for?
Your reason for getting a secured loan will determine the type of loan you get and what you can use the loan for. If you get a secured car loan, for example, the money must be used to purchase the car. On the other hand, if you get a secured personal loan, you can use the cash for whatever you need.
Swoosh offers small secured personal loans starting from $2,200. So if you need quick money ASAP, you can apply online at any time, for any reason.
Can I use a secured loan to build credit?
You can use a secured loan to build credit by making payments on time and diversifying your credit mix. However, this option will not suit every person and situation. You should always consider whether you actually need a loan, if you can afford the repayments, and what your best options are before you apply.
Find out more: Should You Get a Personal Loan to Improve Your Credit Score?
Key features of secured loans
Some of the key features commonly found with secured loans include:
- Collateral requirements: The borrower must pledge a valuable asset as collateral, which is usually specified in the loan agreement.
- Loan amounts: Secured loans often allow borrowers to access larger loan amounts compared to unsecured loans, thanks to the reduced risk for lenders.
- Interest rates: Due to the lower risk associated with secured loans, lenders typically offer lower interest rates compared with unsecured loans.
- Repayment terms: Secured loans may have more flexible repayment terms, including longer repayment periods, providing borrowers with manageable monthly payments.
Popular types of secured loans
Examples of common types of secured loans include:
- Mortgages: Home loans are a common type of secured loan where the property serves as collateral.
- Auto loans: The vehicle being financed acts as collateral in car loans.
- Secured lines of credit: Similar to personal loans, secured lines of credit are backed by collateral and provide a revolving credit limit.
- Secured personal loans: Some personal loans are secured, requiring collateral to mitigate the lender’s risk.
Are there any guaranteed loans?
Advantages and disadvantages of secured loans
Some benefits and drawbacks of secured loans include:
|Access to larger loan amounts
|Risk of losing the collateral in case of default
|Lower interest rates
|The application process may be more involved due to collateral assessment
|Improved chances of loan approval, even for individuals with lower credit scores
Is a secured loan a good idea?
Secured loans can help you get finance at a cheaper rate and with less hassle, but whether a loan option is right for you will depend on your personal and financial circumstances. Make sure to always research your options and seek professional advice if you need further assistance before you apply.
Need a secured loan for bad credit?
Swoosh Finance is a direct Australian lender offering secured bad credit loans of up to $5000. You can borrow money using your car as collateral, and continue to drive it! Apply online today for fast, easy finance!