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What is the difference between a secured and an unsecured loan?

The term secured and unsecured loans are bandied around financial institutions and law firms quite a lot. But do you know what they really mean?

Most loans start with a loan agreement. This document sets out the terms of the loans such as who the borrower is, who the lender is, the amount of the loan, the rate of interest, when repayments are to be made and when the whole amount is due to be re-paid.

Whilst the loan agreement of itself documents the agreement between the parties – to formalise it if you will – it does not always give the lender the right to sell something if the borrower defaults on the repayments or to pay back the balance of monies owed.

This is generally the difference between a secured and unsecured loan.  If the loan agreement does not indicate that lender is to have a mortgage over land owned by the borrower, or a charge over assets owned by the borrower then loan is known as unsecured.  That means that the lender does not have immediate recourse to the mortgaged land or the assets of the borrower to sell and repay itself.

On the other hand, if the lender wants a secured loan the loan agreement usually describes what security the borrower must give, such a mortgage of land or a general security agreement over its assets.  If it does the lender will generally draft the documents that are required to secure the loan.

In very basic terms if a loan is secured it easier for the lender to recover funds if the borrower defaults.  With an unsecured loan the lender may still be able to recover money if the borrower defaults but the process is usually more difficult.

If you are lending money to anyone (even family members) you should consider a secured loan.  If you want to know more pleased contact Wollerman Shacklock Lawyers on 03 9707 1155 or admin@wslegal.com.au