There’s a lot of money in Super in Australia. In fact, total super assets totalled $3.4 trillion at the end of the first quarter of 2022. Are you wondering, can I use my super as security for a loan? While you generally can’t use your super as security for a loan, there are some rare exceptions. If you’re thinking of borrowing against your super, it’s important to understand how it works and what the risks are.
In this article, we’ll discuss what borrowing against your super means and how it works. We’ll also look at why using your super as security for a loan is generally not a good idea, and talk about some other items you can borrow against instead.
What Is Loan Collateral?
Loan collateral is anything that you pledge to a lender as security for a loan. If you default on your loan, the lender can seize the collateral and sell it to repay the loan. Some common examples of collateral include real estate, cars, caravans and boats.
Loan collateral can be useful when you’re having difficulty qualifying for a loan. For instance, if you have bad credit, lenders may be more likely to approve your loan if you offer collateral. That’s because they know they can recoup their losses by selling the collateral if you default on the loan.
Even with good credit, using loan collateral may also mean you can apply for more. It indicates to the lender you have assets to fall back on even if, for whatever reason, you can’t repay the loan.
Remember, having loan collateral isn’t the only things lenders will consider. There are a range of eligibility factors they consider.
Can I Use My Super as Security for a Loan?
In most cases, the answer is no. Your super is meant to be used for retirement, and most banks and lenders will not allow you to use it as collateral for a loan. There are a few rare exceptions where this might be possible, but generally speaking, it’s not something you should count on.
It is, however, something that was raised in a recent inquiry. In March the House of Representatives revealed their recommendations for improving housing affordability. One such recommendation was the ability for young Australians to use their super as collateral for home loans.
Despite this, why is borrowing against your super generally not a good idea? There are a few reasons. First, if you can’t repay your loan, you could lose a large chunk of your retirement savings. That’s a pretty big risk to take, and one that’s not worth it in most cases. Second, even if you can repay your loan, using your super as collateral can jeopardize your retirement plans. That’s because you’re effectively taking money out of your super account. Leaving it in the account gives it the ability to accrue value over time. Taking it out reduces the amount of time it has to grow, which can have a significant impact on your retirement savings.
So, if you’re thinking of borrowing against your super, be sure to consider all the risks involved. In most cases, it’s not worth it. If you’re looking to borrow against something, there are a few other options that are generally better than using your super as collateral. We’ll explore what those are.
What Can I Use as Loan Collateral?
As we mentioned, there are a few common types of loan collateral. Real estate and cars are two of the most common, but they certainly aren’t the only forms of collateral.
Real Estate
Real estate can be a great option as loan collateral. That’s because it typically appreciates in value over time, meaning it will be worth more when you repay the loan than it was when you took it out.
Another benefit of using real estate as collateral is that you can often borrow a larger amount than you could with other forms of collateral. That’s because real estate typically has a higher value than things like cars or boats.
The downside to using real estate as loan collateral is that it can be difficult to qualify for a loan if you don’t have a lot of equity in your property. Equity is the portion of your home’s value that you own outright. So, if your home is worth $500,000 and you have a mortgage for $400,000, your equity would be $100,000.
Banks and lenders typically require borrowers to have at least 20% equity in their property before they’ll approve a loan.
Cars & Caravans
Cars and caravans are another common form of loan collateral. That’s because they usually have a high value relative to their size, and they’re easy to sell if you default on the loan.
The downside to using a car or caravan as collateral is that their value typically depreciates quickly. So, if you’re unable to repay your loan, the lender may not be able to recoup their losses by selling the collateral.
Another thing to keep in mind is that, like real estate, cars and caravans can be difficult to borrow against if you don’t have a lot of equity.
Boats
Boats are another common form of loan collateral. That’s because they usually have a high value relative to their size, and they’re easy to sell if you default on the loan.
Unfortunately like other vehicles, their value can depreciate quickly. So if you’re unable to repay the loan, the lender may not be able to recoup their losses by selling the collateral.
Just as with cars and caravans, boats can be difficult to borrow against if you don’t have a lot of equity.
Other Ways to Increase Your Borrowing Power
While you can use the above as loan collateral, loan collateral isn’t a necessity. There are many ways to increase your borrowing power.
Look at Your Debt-to-Income Ratio
One way to increase your borrowing power is to reduce your debt-to-income ratio. Your debt-to-income ratio is the percentage of your income that goes towards debts, like loans and credit card payments.
For example, let’s say you have a monthly income of $5000 and monthly debts of $2000. Your debt-to-income ratio would be 40%.
Most lenders prefer to see a debt-to-income ratio of 36% or less. So, if you can reduce your debt-to-income ratio, it will give you a better chance of being approved for a loan.
Make a Larger Down Payment
Another way to increase your borrowing power is to make a larger down payment. The down payment is the portion of the purchase price that you pay upfront.
For example, let’s say you’re buying a car for $20,000 and you have a down payment of $4000. That means you’re borrowing $16,000. Making a larger down payment will reduce the amount you need to borrow and may make it easier to get approved for a loan.
Make Regular Savings Deposits
You can also look at increasing the assets you own. One thing lenders look for is genuine proof of savings. They’ll look at factors like how long you’ve been saving and whether you have a history of maintaining a certain balance. If you have a share portfolio this can also help as it can show a history of growth.
As you can see, there are many ways to increase your borrowing power. While loan collateral can help, it’s not a necessity. There are plenty of other options available if you want to borrow money.
Look at Your Job Stability
Lenders look at a range of things when considering your application. One is not just that you are employed, but the type of employment and your career history. You can read more on this right here.
Getting A Vehicle Loan
If you’re looking to get a vehicle loan, there are a few things you need to know.
The first thing you need to do is find the right lender. There are many different lenders out there, so it’s important to compare your options and find the best one for you. C1 Car Loans offer a range of different vehicle loans, so we can help you find the right one for your needs.
Once you’ve found the right lender, it’s time to start the application process. You’ll need to provide some personal and financial information, as well as details about the car you’re looking to buy.
We’ve answered can I use my super as security for a loan, but the better question is should you? While some lenders may consider it, our advice would be to not. There are many other options available that are just as effective, if not more so.
If you’re unsure or have further questions, one of our loan specialists will be more than happy to help. Get in touch with us here.
