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Not Enough Money For That Purchase You’re Dreaming About? These Might Be A Solution For You To Try…

There are times when the money that you may have in your possession isn’t quite enough for a major purchase (such as a car, a boat or a house) and you may need to obtain a loan. Deciding which type of loan is the right type for your situation needs to take into consideration your assets, cash flow and overall goals.

In this case, you may be trying to decide between a secured and an unsecured loan. There’s a key difference between the two types, and it is primarily to do with whether or not the lender requires ‘security’. This generally comes in the form of collateral assets to incentivise the payback of the loan.

Secured Loans

A secured loan requires security (using assets at collateral, such as property, vehicles or inventory). If the loan cannot be met, the lender may use the assets as collateral to clear any outstanding balance, interest or fees.

Essentially, the lender can take possession of the asset and sell it to cover the cost of the loan. However, this also means that the lender can offer a lower interest rate for the loan.

You are more likely to be approved for a secured loan if you can present a collateral/security for the loan that has a value that can match the amount a borrower is intending to borrow. This does also mean that your collateral’s fair value (the asset’s price determined by buyer and seller) needs to be bigger than your loan amount. Lenders will also likely set a higher borrowing limit for secured loans in comparison to unsecured loans, and will not require a guarantor on the loan (as your collateral is the backer in this instance).

Secured loans allow for you to borrow against your assets, but also may involve a longer approval process and period due to the consideration of the assets provided as security. They may require value assessments, additional proof and the documentation of those assets.

Some of the assets that can be used as collateral for secured loans include;
Bank accounts
Vehicles
Stocks, mutual funds or bond investments
Insurance policies, including life insurance.
High-end collectibles and other valuables,

Unsecured Loans
An unsecured loan is not backed up by collateral, which means that an unsecured loan has a greater risk for the lender. This is because the borrower does not provide an asset of value to offset their losses in case of default.

Instead, to determine whether you will be able to pay back the loan, lenders will generally judge you on character, capacity, capital and conditions.

Character refers to a loan applicant’s business acumen, reputation, credit history and track record to repay debt. It includes your credit score, employment history and references.
Capacity involves the lender’s assessment of the borrower’s ability to repay the debt.
Capital means that lenders look into the borrower’s overall financial position (including assets and liabilities, net worth and liquidity).
Conditions include the terms of the loan, outlining the length of repayment, interest rates, frequency of repayment etc.

In the instances of unsecured loans, you do not require collateral to secure a loan – as long as you have a good credit history and credit score, that can be enough to secure the loan. For those who are looking for a short-term and an easy to access the loan, unsecured loans are ideal.

You do need to consider however that an unsecured loan generally comes at a higher interest rate (the price of their convenience). There are also penalties that may be in place for borrowers who violate the terms and conditions of the loan. Your credit history may be adversely affected if you fail to repay the loan amount though, and you will also require a fairly high score/good history for it to be considered for approval.

When it comes to what is better suited to you, you need to examine your objectives, financial situation and your personal circumstances. What’s most important, after deciding what’s right for your specific situation is having a plan in place to pay it back. You can speak with us for help in developing that plan.

If you’re someone who often finds it difficult to make large lump sum payments for goods or services, you may want to consider looking into “Buy Now Pay Later” services.

Buy now pay later essentially means that, rather than paying in a full lump sum payment for a product or services rendered, there may be an option to pay through instalments of a certain amount over a set period to make the sum of the full amount in total. This method should allow you to pay in full for the product or service without overly straining your finances – you pay back what you can, as agreed upon when you begin the buy now pay later service.

Some popular buy now pay later services include Afterpay, Zip Pay, Brightepay, and some credit card networks such as  Mastercard and Visa, can offer buy now pay later arrangements.

Though it can be a convenient, immediate solution, it may be challenging to juggle the necessary repayments with other financial commitments. It’s not always the most appropriate method for people, and you should bear in mind your situation and ability in paying back the amounts. 

Before you sign up, keep in mind: 

  • It becomes easier to overspend with buy now pay later services, so know your limits on what you can and can’t afford.
  • You will be charged fees and costs to use the service, which can add up to a princely sum in and of itself.
  • Keeping track of your payments can be tricky if you’ve signed up for multiple services.
  • It could affect your loan applications for a car or mortgage as lenders consider buy now pay later spending just as much as your credit score.
  • Late repayments can appear on your credit report, which affects your ability to borrow money in the future.
  • Layby can be a cheaper alternative to buy now pay later, with no account-keeping or late fees to consider

If you are someone who could make use of BNPL services, you may wish to:

  • Ensure that when using the BNPL service, you stick to a set limit on what you spend so that you can comfortably pay it back later. 
  • Aim only to have one BNPL account at a time to manage payments through, rather than confuse yourself with multiple payments across different providers.
  • Always budget for bills, loan payments and BNPL payments, and 
  • Rather than use your credit card for payments to your BNPL account, consider linking to your debit account instead.

If you would like assistance in planning your financial future, help in managing your budget or some friendly advice, see us for a chat about what we can do for you.

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John Briggs

Jane Noller has been my accountant for the last 15 plus years. I can testify to Jane’s professionalism and expeditious manner in dealing with the day to day issues that surrounds our business accounting.

John Briggs

Registered Building Certifier