Types of loan security explained

What is security on a loan?

Security is an asset, or a legal promise, that a lender can fall back on if a loan is not repaid. MoneySmart describes a secured loan as one where you offer something you own, such as a car, as security, and if you cannot repay the lender can take it and sell it to recover the debt. The loan is still your obligation, but the security gives the lender a second way to be repaid.

That fallback is the reason security matters so much in lending. The stronger the security, the more comfortable a lender usually feels, and the more flexible the loan can become. Ownright Custom Finance arranges loans Australia-wide, and director Trevor Scott has spent more than 40 years working out which security suits which deal. This guide walks through the main types so the jargon on a loan offer makes sense.

What are the main types of loan security?

Most Australian lending falls into a handful of security families:

• Real property: a house, unit, farm, commercial building or vacant land, secured by a registered mortgage.
• Vehicles and equipment: cars, utes, trucks, machinery and plant, secured by a registered interest in that specific asset.
• Business assets: a general claim over the assets of a company or sole trader, usually documented as a general security agreement.
• Personal promises: a guarantee from a director, a family member or another party.
• Notices and charges: a caveat or other charge that records a claim against a title.
• Financial assets: cash deposits, shares or other investments, used less often.

Which one applies depends on what you are buying or borrowing against. A first home purchase is secured over the home. A tractor loan is secured over the tractor. A working capital loan for a company may be secured over the business and backed by a director’s guarantee.

How does property security work?

Property is the most common security for larger loans. The lender takes a mortgage over the land, and the mortgage is recorded against the title at the relevant state or territory land registry. If the borrower defaults and the lender cannot sort it out with them, the lender may eventually sell the property, repay itself from the proceeds and return any surplus to the owner.

Property security comes in layers. A first mortgage ranks ahead of a second mortgage, and a second ranks ahead of a third, which affects who is paid first from a sale. We explain this in first, second and third mortgages: what ranking means. The amount a lender will lend against a property is described by the loan to value ratio, covered in what is LVR.

If you already have a home loan and need more funds, a second mortgage may be one way to use the equity without disturbing the first loan. Loans like home equity loans work on a similar idea.

What about vehicles, machinery and equipment?

Asset finance is secured over the thing being bought. When a lender finances a ute or an excavator, it records its interest in that asset on the Personal Property Securities Register, or PPSR, a government register that shows security interests in personal property. The PPSR is designed so that buyers and other lenders can check whether an item is already tied to a debt.

Examples include car loans, truck finance and equipment finance. The structure differs between products. In a chattel mortgage you own the asset and the lender holds the security, while in hire purchase the finance company owns it until the end. See our guide on chattel mortgages for the detail.

Because the security is the asset, a lender will care about its age, condition, resale market and whether it is used for business. Older or specialised assets can be harder to finance.

How do business assets and general security agreements work?

When a business borrows without pledging a specific item, the lender may ask for a general security agreement. It gives the lender a registered interest over the assets of the borrower, which can include equipment, stock, receivables and other personal property. It is registered on the PPSR so other creditors can see it.

This sort of security is common in secured business loans and some working capital loans. We cover it in depth in general security agreements and PPSR explained.

What is the difference between security, a guarantee and a caveat?

Type	What it is	Where it is recorded	Typical use
Mortgage	A registered interest over land	State or territory land registry	Home, rural, commercial and private loans
Asset security	An interest in a vehicle or equipment	PPSR	Car, truck and equipment finance
General security agreement	A claim over a business’s assets	PPSR	Business and working capital loans
Guarantee	A promise by another party to repay	The loan contract	Backing for a borrower with limited security
Caveat	A notice of a claimed interest in land	Land title	Short-term and bridging finance

A caveat is not the same as a mortgage. It warns the world that someone claims an interest and can restrict dealings with the property while it stays on title. Some lenders use a caveat for speed and later convert it to a registered mortgage, which is explained in what is a caveat loan. Our caveat loans page covers where they fit.

A guarantee is different again. It adds a person to the risk rather than an asset to the file. Read what is a guarantor before anyone agrees to be one.

How does the choice of security affect your options?

Security changes the conversation in several ways:

• Who will lend. Banks lean towards standard property and well-known assets, while private and specialist lenders can consider less usual security.
• How much you can borrow. More equity or better assets can support a larger loan.
• Documentation. Property-secured loans usually need title searches and valuations, which affects timing.
• Risk to you. Every asset pledged is an asset that could be sold if things go wrong.

This is general information, not personal advice, and the right structure depends on your goals. If a bank has knocked you back because the security was unusual or the deal was complicated, difficult loans is where Ownright often does its best work.

What do lenders look at when they accept security?

• Ownership: the borrower or guarantor must have the right to pledge the asset.
• Value: usually an independent valuation or an assessment of market value.
• Existing debts: who already has a claim, and in what order.
• Condition and marketability: how easily the asset could be sold.
• Insurance: most lenders expect property and vehicles to be insured.
• Purpose: whether the asset is for business or personal use.

You can get ahead of this by pulling together a title search, council or water rates notice, vehicle or equipment details and recent statements. Our guides on how to get a property title search and what documents do I need for a loan help with that.

Common mistakes to avoid with security

1. Offering more assets than the loan needs, then finding they are hard to release later.
2. Forgetting an existing charge, caveat or PPSR registration that sits ahead of the new lender.
3. Assuming a guarantee is a formality when it is a genuine financial commitment.
4. Not asking how and when the security is released on repayment or refinance.
5. Mixing business and personal assets without understanding the consequences.

How does Ownright approach security?

Our job is to find a workable route when the obvious one is blocked. Sometimes that means using equity in one property rather than three, sometimes it means pairing a modest asset with strong cash flow, and sometimes it means looking at a private first mortgage or a personal loan secured over a vehicle where an unsecured loan is out of reach. Trevor Scott and the team assess each case on its merits, Australia-wide, and we will tell you plainly when a structure carries risk you should weigh up. If Ownright can’t find the solution, no one can.

Illustrative scenarios: how security plays out

These are illustrative situations only, with no real people and no figures that imply pricing.

A tradie with a clean record and a thin deposit. A sole trader wants a work vehicle. The vehicle itself is the security, the lender registers its interest, and the deal turns mostly on income evidence and the vehicle’s age. No property needs to be involved.

A small company needing working capital. The business has equipment and receivables but no property. A general security agreement over the business may be offered, often with a director guarantee, and the lender looks hard at cash flow.

A homeowner with a tax debt and a declined refinance. The home has equity, but the bank’s policy does not fit the situation. A private lender is more interested in the property, the equity and a believable exit. A second mortgage or a short-term first mortgage may be the structure considered.

Each case shows the same principle. The lender is asking, “if this goes wrong, what do I have, and how quickly can I turn it into cash?” The better your answer, the more room there is to negotiate.

How do you release or change security later?

Security is not permanent. When you refinance, sell the asset or finish the loan, the lender’s interest needs to be removed, and a new lender will want to see a clean title or register. A few practical points:

• Ask for a payout figure and a discharge of mortgage or PPSR removal as part of the settlement.
• If you want to swap one asset for another, ask the lender whether substitution is possible and what it would cost.
• If several assets secure one loan, ask whether a partial release is available as the balance falls.
• Keep your own copies of discharge documents.

Getting this right early makes the next loan easier, because the next lender will ask what is already registered.

Ready to talk about your security and your loan?

Sounds like you’re looking for finance and want to know what you can put behind it. We’re the lending experts in matching the right security to the right loan, so see if you qualify and we’ll take it from there.