Underlying Security in Asset Finance: What Australians Need to Know (2025)

When it comes to asset finance in Australia—whether you’re seeking a business loan, vehicle finance, or equipment leasing—the concept of underlying security is pivotal. It’s not just financial jargon: it’s the foundation that lenders use to safeguard their interests and determine your borrowing power. As economic headwinds and regulatory updates reshape the finance landscape in 2025, understanding underlying security is more important than ever for both individuals and businesses.

What Is Underlying Security?

Underlying security refers to the asset or collateral that underpins a loan or finance agreement. In practical terms, it’s what the lender can repossess or claim if the borrower defaults. This could be anything from a car in a vehicle loan, machinery in equipment finance, or even real estate in a secured business loan.

For Australian lenders, underlying security isn’t just a formality—it’s a risk management tool. The more valuable and liquid the security, the more favourable the loan terms you’re likely to receive. Conversely, unsecured finance (with no underlying security) typically comes with higher interest rates and stricter eligibility criteria.

• Vehicle finance: The car itself is the underlying security.
• Equipment loans: The financed machinery or technology acts as security.
• Secured business loans: Property, inventory, or receivables can be used as collateral.

In 2025, lenders are placing even greater emphasis on the quality and liquidity of underlying security, responding to tighter regulatory oversight from APRA and shifting risk appetites in a post-pandemic economy.

Why Lenders Care: Risk, Recovery, and Borrower Benefits

Lenders assess underlying security to mitigate their risk exposure. If you default, they need a clear path to recover funds. The security’s market value, depreciation rate, and ease of sale all factor into a lender’s decision. For example, commercial vehicles or new equipment with strong resale markets are highly desirable forms of security.

From a borrower’s perspective, offering robust security can unlock significant benefits:

• Lower interest rates: Secured loans often attract more competitive rates than unsecured alternatives.
• Higher approval odds: Solid security can offset weaker credit history or lower cash flow.
• Flexible loan terms: Lenders may offer longer repayment periods or larger loan amounts.

Consider a manufacturing business in Victoria seeking $500,000 to upgrade machinery. By offering the new machinery as security, the business secures a lower rate and longer term, compared to an unsecured loan. If the business were to default, the lender could repossess and sell the machinery to recover the balance.

2025 Policy Updates: What’s Changed for Underlying Security?

This year, several regulatory and market developments are reshaping how underlying security is assessed and valued in Australia:

• APRA Guidelines Tighten: The Australian Prudential Regulation Authority (APRA) has introduced stricter asset verification requirements for lenders, especially for non-bank financiers. This means more thorough documentation and valuations for underlying security, particularly for assets that depreciate quickly (like tech equipment).
• Green Assets in Focus: With the federal government’s 2025 Clean Energy Finance Initiative, lenders are more willing to accept renewable energy equipment (like solar panels or EV fleets) as security, often with enhanced terms or interest rate discounts.
• Digital Asset Security: Some fintech lenders now accept certain digital assets (such as commercial software licenses or intellectual property) as underlying security, although this remains niche and subject to strict criteria.

Borrowers should be prepared for enhanced due diligence. Expect detailed asset appraisals, updated insurance requirements, and more robust documentation as standard practice this year.

Key Considerations for Borrowers in 2025

If you’re looking to use underlying security for a new loan or finance agreement, here’s what to keep front of mind:

• Asset Valuation: Ensure your proposed security is accurately valued, with recent appraisals and clear title.
• Depreciation Impact: Recognise that rapidly depreciating assets may be discounted by lenders, limiting your borrowing capacity.
• Legal and Insurance Requirements: Lenders will typically require proof of ownership and adequate insurance to protect the asset throughout the loan term.
• Exit Strategies: Understand what happens if you default—how quickly and easily can the lender repossess and sell the asset? What are the potential financial consequences?

With a competitive lending market and increased regulatory scrutiny, taking the time to present strong, clearly documented underlying security can be the difference between loan approval and rejection.