What is a secured loan?

A secured loan comes with a security agreement sitting alongside the loan contract. That agreement gives the lender a claim over a named asset: land under a mortgage, or goods such as a ute, excavator or trailer under a registration on the Personal Property Securities Register. The claim stays over the asset until the loan is paid out.

You keep possession and use the asset the whole time. Registration decides who ranks first from the day it is made, and it stops the asset being sold to someone else free of that claim. An interest that is not registered in time can be lost entirely if the borrower becomes insolvent or sells the asset. Once the final payment clears, the lender releases its interest.

Lenders price risk. With security behind the loan, a default still leaves something to sell to recover the money, so a lender can advance more, for longer, at a lower cost than it otherwise would. Without security it is relying on your promise to pay and your trading record, so amounts are usually smaller and terms shorter.

The trade off sits with the borrower. Security ties up an asset, and a lender may also want company directors to stand behind a business facility personally. Weigh what the security costs you against what it saves you, and read which assets the agreement actually covers, because some are drafted broadly enough to catch more than the item being financed.

Most large borrowing in Australia is secured. Home loans are backed by the property, equipment finance by the machine or vehicle, and many business facilities by a charge over company assets or receivables. New businesses and borrowers with a thin credit file are more likely to be asked for security, because the lender has less history to work with.

Security also changes what happens at the end of the loan. Some agreements release the asset automatically on final payment, while others need you to request a discharge and confirm the registration has been removed. It is worth checking, because an old registration left in place can hold up a sale or a refinance.