Cash-secured loans, unlike other types of secured loans, use the money you keep with your financial institution as collateral. This article will explain how cash-secured loans operate, and in what situations you may find one useful.
How does a cash-secured loan work?
Traditional secured loans require you to offer an asset such as a house or a car to provide collateral for your own. Banks do this to have confidence in lending you money – where you default they are able to liquidate your assets to receive part or all of the value of your loan. On the other hand, cash-secured loans are backed by the money you have in a bank account. This has several advantages for both parties.
As the money you are borrowing is already secured by existing funds there is virtually no risk for the loaner. Furthermore, the loaner is able to access 100% of the borrowed value in the event of a default, unlike an asset which has an uncertain value.
This means that cash-secured loans typically come with far lower interest rates than your conventional credit card loan or unsecured personal loan.
Cash-secured loans are generally not a widely marketed product in Australia due to their unusual nature. You can inquire about cash-secured loans with your financial institution.
Why would you get a cash-secured loan?
You may be wondering why you would ever get a loan if you already have the cash to spend for whatever you want to use it for. Cash-secured loans can be useful for a number of purposes. Here are some suggestions:
1. As a cash-secured guarantor
For instance, you can use your own bank account as collateral for your child’s car loan. This allows you to insure for your child’s lack of credit whilst still giving them initial responsibility for repaying the loan.
2. To build your credit score
If you have never borrowed or have a low credit score it can be far easier to borrow through cash-secured loans initially. You can use these stones to gradually build up your credit score to borrow more in the future.
3. To maintain a term deposit
You may have existing funds in a term-deposit account which you don’t want to withdraw from. You can put that account as collateral to secure a loan whilst maintaining the interest rate from your account. Employ this only as a stopgap as the interest rate of the loan is likely higher than the rate of return on your term deposit.
4. When selling an asset
If you used an existing asset to secure a loan, you can sell the asset and use the cash to continue securing that loan. For example, if you sold a house and are looking to use that money to buy another house, you can use the cash in the interim to secure a loan for a separate purpose.
5. To keep your finances separate
Often people want to keep their savings account untouched as a matter of psychological discipline. In this instance, you can borrow against your account so as not to disturb its contents.
Summary
- Cash-secured loans use the money you own as collateral
- They often have lower interest rates
- They are useful when you want to avoid directly using your own money
If you have any issues regarding your financial situation or debt recovery, we recommend that you get advice from our lawyers.
