Finding a better deal – how to offer security for your loan and what to offer in 2022
If you're comfortable with collateral, securing your loan could get you a better rate
When you’re choosing a personal loan, you want to make sure it’s the right one for you. There are two types of personal loan you might choose from: secured and unsecured.
Unsecured is simple enough, but a secured loan has a little bit more to it.
Here, we explain what a secured loan is and how it might be able to get you a better deal.
What is a secured personal loan?
A secured personal loan means you’re offering something you own as collateral against the loan in case you can’t repay. This lowers the risk to the lender. So, depending on the quality of the asset, your lender will offer a lower interest rate. It also might increase your chances of being approved for the loan at all.
While that sounds great, there are things you need to be aware of.
Who offers secured personal loans and how does it help?
Not every lender offers security on personal loans, but there are a handful that do have it as an option.
For example, NOW Finance is a personal finance lender which offers both secured and unsecured personal loans. It offers personal loans for a range of reasons, including vehicle purchasing, debt consolidation and home improvements.
At NOW Finance, you can offer to use a vehicle, including car or boat, as security. This will lower your interest rate by at least 1% per annum. And with no fees for their loans, that’s even more money you can put straight towards paying off your loan.
What kind of security can I offer?
Lenders won’t accept just anything you own as security: you can’t offer up your old phone and expect your interest rate to drop.
It can vary, so it’s important to speak to the lender, but most lenders will accept:
- Your vehicle - Particularly if you’re using the loan to buy a car or other vehicle, you can put forward the new vehicle as security. If the loan is not for a car, you can still use an existing car that you own, but typically it should be less than 2 years old.
- House - You can draw from the equity of your home if you own one. Equity is the amount of the home you own based on what you’ve already paid off on your mortgage.
- Money - It might seem weird to put forward money as security for borrowed money, but it happens. This is typically with your savings account, but some lenders may accept a certificate of deposit or other accounts you have. When you use money in this way, you would normally be able to borrow a percentage of the amount you’ve offered for security.
- Valuable items - This is not so common, but some lenders will allow you to offer up valuable items as security. This includes things like jewellery, fine art or antiques. Again, this is one to speak to your lender about.
How can I offer security?
Not all lenders accept secured loans, so you need to make sure the lender you’re looking at does. They will usually advertise it on their website if it’s an option and you can choose your security type at application.
Sometimes, offering up an asset as security is a little more nuanced, so having a conversation with your lender can go a long way to getting to the specifics.
Either way, the lender will need to know about the asset you’re offering to make sure it meets its criteria. Lenders will take into account the value of any asset to ensure it is appropriate security relative to the amount borrowed. For a vehicle as security, you will need to provide information such as the make, model and year.
What happens to my collateral if I can’t repay my loan?
This is arguably the biggest downside to a secured loan. If you fail to repay your loan, the lender can seize your assets, as well as report your default.
If you’re putting up your home, a vehicle or a large amount of money, this can put you in great difficulty. So be sure that you feel confident you'll repay the loan before you offer up security!
Should I choose a secured loan?
Balancing the risk to your asset compared to the lower interest rate is something only you can decide.
Secured loans could have different loan terms and loan amounts compared to unsecured loans, so you’d need to be sure these match up with your own needs.
If we go back to our example of NOW Finance, a secured loan has a higher loan amount than an unsecured loan. You could borrow up to $100,000, which is twice as much as its unsecured counterpart.
As long as you’re certain you can meet your repayments, offering security is a great way to lower your interest rate, borrow more money and increase your chances of being approved for a loan at all.