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It is common for businesses to borrow money when they are starting out. This is to give businesses cash to purchase any capital and ensure that they can cover all their costs. Many banks will have schemes that allow small businesses to take out loans. However, they are likely to want some type of security for this. Starting a small business is difficult, so the bank needs to be prepared to cover any loan defaults. This article will explain whether you can use property as security when taking out a loan in New Zealand. 

What is Security for a Loan?

When you borrow money from a financial institution, the institution will usually need security before offering you the money. Security means something of value that the bank can take and sell if you fail to pay back your loan. The amount that your security interest will need to be worth will depend on the circumstances of the loan and your income during the loan period. For example, if you are taking out a mortgage, the house you buy will usually act as security for the loan.

Can Property Be Used as Security?

Yes, property can be used as a security as long as your lender is satisfied with it. Your lender will accept your property as security if it is worth a certain value compared to the loan you are taking out. Financial institutions need security so that they have protection if you default on your loan. If you default on your loan, your lender has the legal right to take your security and sell it to make back as much money on the loan they have lost. 

Benefits of Using Property as Security

There are several benefits to using property as security when taking out a loan. For example:

  • you are more likely to have your loan approved as property is considered a safe asset;
  • you may be able to borrow a greater amount; and
  • you can use your own home as security for a business loan, so you do not need an existing business asset. 

In addition, using property as security may also make your loan cheaper. This is because property is seen as a safe security, which can lower your interest rates in comparison to unsecured loans.

Risks of Using Property as Security

However, there are risks of using property as security when loaning money. One of the more obvious risks is that lenders can take your property if you default on your loan. This means that if you have used your own home as security for a business loan, you could end up homeless. For some people, this may not be a risk that you are willing to take especially if you do not have multiple properties.

It is important to remember that most lenders will try and find a better solution, so they do not have to resort to property sale. For example, they may relax the terms of your loan or restructure it to make it easier for you to pay off your loan. This is especially true if you are working with a bank in comparison to a loan shark. 

How Do I Avoid Defaulting on My Loan?

You can take the following steps to avoid defaulting on your loan before you take it out:

  1. make sure that you are in a position where you can make all interest payments and can repay your loan.
  2. prepare a forecast of your future revenue and costs to determine whether the loan is feasible for your company.
  3. be particularly careful if you are putting up personal assets as security. 

Key Takeaways

If you or your business needs to borrow money, the lender is likely to want security for the loan. Security guarantees payment of an obligation as the lender can sell the security if you cannot repay your loan. A common asset that is used as security is property. This is because it is a safe asset that is of high value. However, you need to ensure that you can afford the loan before you put your property up as security, as you could lose it if you default on your loan. For legal assistance with loan contracts, contact LegalVision’s New Zealand corporate lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to provide security for my loan?

Not all loans will need security. Loans that do not need security are known as unsecured loans. However, these generally charge a higher interest rate, and you may not be able to borrow as much money.

Will my security always be sold if I default on my loan?

If you can agree with your lender to pay off the loan in another way, then the lender can avoid selling your security. 

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