Secured Loan Rate

The redistribution of assets is one of the most important aspects of our modern economy, simply due to the conventional device of the loan. As we have seen in recent years, loans can metamorphose into agreements to repay money, property or even other loans.
Even with financiers having the ability to propagate loans of dubious character and form, the basic tenets of borrowing will remain to be:

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• the establishment of the principal
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• the amount to be extended on loan
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• the repayment schedule
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• the consequences for default of the agreement

It is extremely important for the individuals involved, and also the broader community, that these four characteristics are upheld. Without them, as was seen in the Global Financial Crisis of 2007, what is now our global economy will come under threat. In 2007, it was the repayment schedule aspect, and that of the consequences for breach that brought the financial markets to a standstill. When lenders could no longer be assured of having loans repaid, they stopped lending, and lending is essential to continued economic activity on a daily basis.

Certainly, risk is inherent in every loan, and in addition to the identity and reputation of the borrower, the interest applied to a loan is a reflection of the risk adopted by the lender. Still, as was seen in 2007, lending practices became so entrenched that the quantification of risk became outdated and wasreplaced by what was later realized to be quite inappropriate rates of market interest. The identity of the borrowers was thought to be sound when in fact they were insolvent. This lack of transparency is at the crux of the issue, as the only provision for lending default in a modern society is the law of bankruptcy.
Bankruptcy hails from Biblical times and essentially fulfills a legal process to notify creditors and liquidate and distribute all assets according to the quality of the creditors lending agreements. Without sufficient assets to cover borrowings, creditors will invariably leave unsatisfied with amounts outstanding having to be written off. One cannot get blood out of a stone. It is here that the secured loan reigns supreme. Unless a lender has an agreement that is of higher quality than competing agreements, they will be subjected to an order of priority and will have to give way to others. If assets are depleted, creditors will remain unpaid.

The Golden Egg

The highest quality loans are those of secured creditors. This means that when initiating the loan agreement, certain specific assets of the borrower were incorporated to provide collateral and security to the lender, in addition to the borrower’s reputation, and in addition to the interest rate applied. Here, when either the borrower’s reputation is tarnished (as was the case in 2007’s GFC), or if any type of default occurs, the security offered by collateral is a welcome comfort to a lender.
While certainly reflecting more protection, the security need not be in possession of the lender, as with some tangible assets this is rather impractical. Rather, the mere evidence that a loan has been previously secured with assets through an express commitment by the borrower, ensures that a lender will recover the asset at very least. Given this certainty, most lenders will offer a lower rate of interest and dispense with the need for reputation and standing of the borrower, if indeed sufficient security is provided.

While cash rates remain the benchmark prime lending rate between financial institutions, secured loans such as mortgages travel at around 3% above the Central Banks cash rate.