How Does A Secured Loan Work?
Under a secured loan the lender (bank, finance company) takes the asset that you’re using the loan for (e.g. car, boat) as collateral. The lender registers an interest (also known as an encumbrance) in the asset to show others that they are using it as security for the loan.
Whilst you take ownership of the asset at the time of purchase the lender will keep their interest registered until the loan is fully paid. Once the loan is paid in full the lender removes their interest and you have what is known as ‘clear title’.
Who Does A Secured Loan Suit?
Secured loans are commonly used by private individuals buying assets for predominantly personal use.
Secured Loan – Pros
Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your loan, so one repayment covers all of your costs.
Credit History – If you’re new to borrowing a secured loan can be a great way to get what you want and help establish a credit history for you which can come in useful down the track for things like mortgages.
Minus Equity – If you are trading in an asset which is financed and you owe more on the outstanding loan than the asset is worth you may be able to include this minus equity amount in with the loan for the asset that you’re buying.
Secured Loan – Cons
Security – Although using your asset as security can help to get you a lower interest rate it also means that if you don’t make your agreed payments you risk the asset being repossessed.
Business Use – If you’re using the asset for predominantly business purposes then a secured loan is not the most effective option for you.
Asset Only – By securing the loan against an asset it means that the amount that you borrow can only be used for the purpose of buying the asset. You can’t split the funds and use part for the asset and part for something else.