Australia’s $2.47 trillion household debt is often cast in a negative light. But a significant part of this can be defined as good debt. In fact, given more than half of our debt (56.3%) goes to home loans and over a third (36.5%) funds investments, a total of 92.8% of our personal household debt is spent on wealth-building purposes.

Forms of debt like secured personal loans can be a great tool for achieving your lifestyle and wealth-building goals, if used sensibly. A secured personal loan can cover you for a temporary shortfall or a financial emergency, so you can meet your other ongoing obligations. This gets you back on track faster. Before you apply for a secured personal loan, you’ll want to learn more about this type of loan and how to apply for one.

What’s a personal loan?

Personal loans provide the borrower with an amount of money and in return, the borrower makes specified repayments that include interest and loan fees. Personal loans tend to be for smaller amounts than products like home loans. If it’s a secured personal. loan, you might be able to borrow more than otherwise, as your debt will be secured by an underlying asset as collateral.

The difference between a secured and unsecured loan

A secured loan means an underlying asset – such as cars, motorcycles, or jewellery – is used as collateral. With an unsecured loan, there is no underlying collateral and the lender is relying entirely on the borrower’s capacity and willingness to repay.

Unsecured loan

Unsecured loans are amounts of money lent to you with the agreement you’ll make regular repayments. Interest is charged and included as part of your agreements. With an unsecured loan, the lender can’t exercise interest in any collateral if the borrower can’t make the repayments – because the loan doesn’t have collateral attached to it. Examples of unsecured loans include credit cards, cash advances, and unsecured personal loans.

Secured loan

Secured loans are amounts of money lent to the borrower secured by an underlying asset, such as jewellery or car. The borrower is required to make the applicable interest and principal repayments according to an agreed schedule. If the borrower fails to make the repayments, the lender can take action by selling the collateral to recover the borrowed amount.

Secured loans include secured personal loans. Mortgages are another example of a secured loan. Since they’re secured by collateral, secured loans tend to come with a lower interest rate than unsecured loans.

What do you need to get a secured personal loan

The application process for a secured personal loan is similar to other types of loans. But before you get the paperwork together, consider what you need and check if you’re eligible.

Evaluate how much you need

The key question is, if you’re struggling to save for what you’re buying with a secured personal loan, can you be confident about making the repayments? Even if it’s for an unforeseen emergency or shortfall, make sure you can make the repayments. If the answer is yes, you might want to proceed and ask yourself a few more questions.

• Specific repayments – Have I estimated the repayments correct? What will the repayments likely be? Can I be confident of making them?
• Paying it off – How long will it take for me to pay it off? Am I okay with this timeframe?
• Longer term – Will it be paid off by the time I’ll likely need to take on extra debt? For example, if you’re buying a house within the next few years, will you have paid the secured personal loan off before committing to another major loan? Multiple loans can be hard to manage, so it’s a good idea to have one paid off before you take on another one.

Check if you’re eligible

Get a general idea as to whether you’re eligible by checking the basic criteria. For example, lenders might require you to be at least 18 years of age and be an Australian citizen or permanent resident. Make sure you can provide proof of identity and evidence of residence at your address for at least, say, three months. You might need to pass a credit check and demonstrate employment and income. If you have a long history of poor credit, already have a lot of personal debt, or are in bankruptcy proceedings, you might be ineligible for a secured personal loan.

List your assets for collateral

The next step is to review your options for collateral. If you have assets of value, like an unencumbered car or motorcycle (no outstanding financing or current use as collateral), you might be able to use these as collateral. Other assets you might be able to use include jewellery, caravans, boats, houses, business equipment, and shares (which might need a longer approval process).

List your assets and consider which one would be appropriate to use for collateral. When it comes time to apply, you can speak to you lender about the best option on your list.

But since secured loans tend to be for larger amounts, your assets need to be worth enough to cover the cost of repossessing and selling the item, not only the cost of the loan. Also keep in mind assets like cars and equipment depreciate in value over time. Their age can affect whether they can be used as collateral or not. The asset should not already be used as security for another loan.

Complete the application forms for your secured personal loan

The final step is to complete the application forms and submit supporting documents. You’ll probably need to provide paperwork like payslips, bank statements, and evidence of residence at your current address. For the collateral, you might need to demonstrate ownership with proof-of-ownership paperwork, like car registration documents or jewellery certificates.

Check with your lender if you have any doubts about the information and paperwork you need to submit with your application. It’s always best to ensure your application is complete so you can get approved as soon as possible.

Receive your money

Once your application for a secured loan is approved – usually within 48 hours – the funds will usually be available in your nominated bank account within a matter of hours or a day. Once the funds have cleared, you can use them for anything, whether it’s for an emergency shortfall or a lifestyle goal you had in mind.

Benefits of secured loans

Secured personal loans are flexible as they can be used for anything you like. You can finance all or part of an overseas trip, pay for your wedding, and fund your honeymoon. You can use this type of loan to cover the costs of a new car or to boost the value of your house with some improvements. Secured personal loans can be used to consolidate multiple debts, lower your interest payments and loan costs, and help you pay the debt off more quickly.

One major benefits of secured loans is they’re cheaper, especially when compared to credit cards. Since they’re secured by an underlying asset of value, the lender can take possession of the asset and sell it to cover their losses if you happen to default. This means the loan’s risk profile is considerably lower and so the interest rates applied to the loan will be lower.

An additional benefit is you’ll be able to borrow more with a secured loan than an unsecured loan. If you applied for an unsecured loan for the same amount, you might be turned down or be subject to higher interest rates, regardless of your income. With a secured loan, you’ll still have limits, but they will be higher than with an unsecured loan.

Personal loans tend to require less paperwork than home loans or car loans, so you could put together your application and be approved more quickly, so you have the cash in hand as soon as possible.

A personal loan is a great option to consider if you have a special purchase in mind or if you are looking to consolidate debt and reduce the cost of your existing loans. Whether it’s for financing an overseas holiday, a special occasion such as a wedding, honeymoon or a renovation, a personal loan offers a flexible and convenient way for you to access the funds you need.

Things to consider

Any type of loan comes with features and risks that you as the borrower should know about. You’ll need to pay an upfront fee and also an ongoing monthly fee. Additionally, if you miss a repayment, you could lower your credit score or even lose your collateral, without the lender even having to go to court. Ensure you can make the repayments and set up direct debit repayments so you don’t forget. If you’re still concerned about how to manage your debt and finances, talk to a qualified counsellor.

A great solution

Personal loans can be good forms of debt when used to cover personal emergencies or to finance lifestyle goals and build wealth for the longer term. An unsecured loan could allow you to borrow more than otherwise, and you can end up paying less in interest. Make sure you have the right type of collateral and supporting documentation, and check you can make the repayments before you apply. By being realistic about how much you need and ability to make the repayments, you can successful leverage a secured personal loan to achieve your goals.

SRG Finance is a leader in short-term personal finance solutions to Australian consumers. With over 13 years of experience in lending to individuals and businesses, we understand real-life situations and we can provide you with a finance solution for your needs that major banks often can’t. Contact us today for more information on our secured loan products.