Today is a day for being brave! I’ve decided to start this article with a few definitions, and I know at this point your eyes will be rolling back into your head and with thoughts questioning my sanity.
However, fortune favours the brave, so here goes!
When exploring finance options for a new vehicle, caravan, boat, and even the family home, it’s important to understand a few key terms. These terms will be critical in your decision whether to proceed with a finance option or not. They also impact on the legal obligations under the finance contract between borrower and lender. As such, Fortified Finance and Leasing strongly recommends that you seek professional legal advice from a lawyer before committing to a finance contract where you have any doubts about the contract conditions or you don’t fully understand your rights and obligations.
OK, back to those annoying definitions! Let’s get them out there and then explore a few.
- Security – It is the tangible item that you offer the lender as collateral security for the loan you wish to take out. E.g. Let’s say you find the perfect caravan to purchase. The lender will take security over the caravan in exchange for the loan. If things go bad forcing the lender to recover the debt, they can take possession of the asset that had been offered as security.
- Unsecured loans – By definition, these loans do not have any security. The products are flexible and can have multiple uses for the one loan. Examples include some types of personal loans, credit cards and other types of low value consumer loans. An unsecured loan can be used to purchase vehicles of any age, pay for repairs, undertake debt consolidation, or purchase some luxury items such as a spa bath. The list really is endless! The interest rates for unsecured loans are generally higher than secured loans as the potential risk for the lender is higher. Lending people often use the term ‘rate for risk’ in conversations to describe this situation.
- Secured loans – These loans are secured against some form of asset, typically, the asset being purchased. A secured loan is ideally designed for the purchase of vehicles, caravans, boats etc. In the event of default, the bank can repossess the item, and then sell it to recoup the outstanding debt. If the asset being purchased doesn’t fall within the broad category of acceptable security, the lender may accept another asset as security. For example, securing finance on aircraft can often prove challenging. A borrower may offer their home as security in place of the aircraft to secure the funding. In the event of default, the lender would seek to take possession of the house rather than the aircraft.
Secured and unsecured lending products generally serve different purposes. Unless special circumstances exist, purchasing a motor vehicle through a secured loan would often be the most appropriate option as the rates are often substantially lower than unsecured loans. That would have a noticeable effect on your repayment amount and the total interest paid over the term of the loan.
As the pricing on secured lending is ‘sharper’ or more competitive than unsecured lending, the banks generally have tighter lending criteria associated with the products. For example, secured car loans are generally only available for vehicles up to certain age limits, often in the 6 – 8 year range. If that terrific little car you’ve fallen in love with is older than the specified limit, then you simply need to look at unsecured loans and accept that you may pay a higher interest rate.
To highlight the point, at the time of writing this article the rate difference between secured and unsecured vehicle loans was up to 7%. From the lenders perspective, it is far more profitable when the customer ends up with an unsecured loan. For that reason alone, the benefits of using a finance specialist such as Fortified Finance and Leasing are clear.
Your finance specialist will deal with the banks on your behalf, and have the advantage of being up to date with all the current loan products, lending policies, and interest rates. It’s their job to find an appropriate lending option for your circumstances and requirements from the panel of lenders they use.
Clearly, there are pros and cons when taking out either a secured or unsecured loan. Every product is different and every lender has variations in their lending policies. Having a professional on your side helps you navigate this challenging process.
Dave Challinor, Fortified Finance & Leasing
No one method of finance is ideal for everyone. All decisions should be made in consideration of your current and expected circumstances, and after discussion with your financial advisor.
ABOUT DAVE CHALLINOR AND FORTIFIED FINANCE
Dave Challinor brings diverse banking and lending experience developed since 1993 into his work as owner and principal broker at Fortified Finance and Leasing. Finance for earthmoving, agricultural and other heavy machinery is a highly specialised area, requiring expertise and knowledge of their unique financing criteria. Dave recognises the need to continually adapt by bringing new and enhanced products to clients at a competitive price. The team at Fortified Finance has an industry renowned reputation for service and results in securing finance, and are committed to delivering the right finance @ the right time and price.