Secured or unsecured loans? The pros and cons.

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There are two options when borrowing from a lender. You can choose a secured loan or an unsecured loan. We are going to take a look at the both options, but before we do lets explain the difference between the two types of loans.

A secured loan uses an asset you own or the one you are purchasing, as security for the loan. The lender takes it as security, and it is released when the loan is repaid. Conversely, an unsecured loan does not use any assets as security for the loan.

So, what are the pros and cons of both options:

Secured Loans

Lower Interest Rates

The interest rate will reflect the Lenders risk on a loan and if they have security over the vehicle, then this (on most occasions) reduces their risk. The newer the vehicle the better the interest rates tend to be. For example; taking security over a vehicle up to 3 years old will be lower risk than a vehicle 10 years old. Hence you are likely to get a lower rate on the newer vehicle.

PPSR

If security is being taken over a vehicle then the Lender (or Broker) will perform a PPSR check on the vehicle, to ensure it is not written off or used as security for a loan. This is not generally required if you are purchasing the vehicle from a licensed motor vehicle dealer, they are required to clear the title prior to selling it. Having said that, they are not obligated to disclose a used car as a ‘repairable write off unless you ask them. Under some circumstances a PPSR is recommended for a dealer sale.

Extra Fees

When a Lender takes security over a vehicle it can lead to higher fees. Government fees and charges are incurred for registering a security interest over the vehicle, and these are passed on to the borrowers.

Payment direct to Supplier

Payment will need to be made directly to the Vendor (Seller) of the goods, and this applies to Private Sales too. The Lender is using the vehicle as security for the loan so they need to ensure payment is made directly to the Vendor. This is a safeguard ensuring the purchase does proceed. To legitimise the transaction, a Tax invoice is provided by the Dealer to confirm the final funds payable. And for Private Sales an invoice is signed between the Borrower and Vendor; agreeing to the terms..

Motor Vehicle Insurance

Most people Comprehensively Insure their vehicles regardless. However, if the vehicle is being used as security for the loan then it is compulsory to Insure the vehicle and note the Lender as the Interest Party on the Policy. In the event of a significant claim through the Insurer, they will advise the Lender. Often, the insurance premiums can be higher if the loan is secured against the insured vehicle.

Increase Your Borrowing

Lenders will likely require a lesser deposit and will lend you more if the loan is secured. Other factors may affect your borrowing capacity, but generally you are able to borrow more as security reduces the lender risk.

Unsecured Loans

These loans do not use any of your assets as security., therefore they expose the lender to a higher risk. So, many of the features you see with the secured loans do not apply to unsecured loans. Here are some of those features.

No early termination fees

Many Lenders offering unsecured loans do not charge early termination fees on their loans. This provides flexibility’s with repaying the loan early.

Redraw.

Redraw may apply to your variable or fixed rate, unsecured loan. If this is a feature you require on your loan then an unsecured loan may suit you. Not all lenders offer this feature so it is important to ask your Broker or Lender if this feature is available.

You control funds

The funds will be paid directly to you (unless otherwise instructed), allowing you to control payment of the funds to the Vendor – Dealer or Private.

Variable interest rates

Secured loans are predominantly fixed rate loan products. Many Personal loan lenders offering unsecured loans, offer a variable interest rate alternative.

Do your checks

if you are purchasing a vehicle from a Dealer or Private Seller, ensure you conduct your ‘checks and balances’. With an Unsecured loan, the Lenders do not perform checks such as PPSR and Vendor Identity checks. If you are using a Broker then they will help guide you with these checks. For more information on private sales, check out our blog.

The team at yeaapproved.com.au will help guide you through the decision process of secured versus unsecured loans, and match a loan to suit your requirements.

The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.

Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.

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