A secured loan is a type of debt or loan. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money, called the principal, from the lender, and is obligated to repay the money to the lender at a later time depending on the agreed terms between the two parties. These terms could include the interest rate which to the borrower, is the cost of using the loan amount and to the lender income or return on the loan amount for the period the borrower will use the money.
Secured loan is when a pledges some asset (like stocks, landed property) as security for the loan, which provides the lender a second way out in case the borrower does not pay fully or partially. The debt is thus secured against the security. Therefore, the creditor takes possession of the asset used as collateral and may sell it to satisfy the repayment of the loan in the event that the borrower defaults in repaying the debt originally lent including accrued interest to the borrower, for example, foreclosure of a home. The benefits to the creditor is that this is a category of loan can always be recovered.
Secured loan is the opposite of unsecured debt which is not tied to any particular asset and instead the creditor may satisfy the debt against the borrower rather than just the borrower’s collateral. There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the lender to take the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the borrowers may receive loans on more favorable terms than that available for unsecured loans, or to be extended loan under circumstances when loan
under terms of unsecured loans would not be extended at all. The creditor may offer a loan with attractive interest rates and longer repayment periods for the secured loan.
Some of the types of a secured loan are:
A mortgage loan is a secured loan in which the security is property, such as a residential or commercial property.
A non recourse loan is a secured loan where the security is the only way out the creditor has against the borrower, and the creditor has no further recourse against the borrower for any shortfall after foreclosure claim against the landed property.
A debenture loan is a secured loan in which the security is the assets of the debtor company. The loan in this case is often used for the opeerations of the company. The Loan amount could also be used to finance the purchase of additional assets for the company. If this happens, the assets being financed with the loan proceeds could be tied to the loan as the collateral security for the loan while the existing assets of the company are free or used for financing other items needed by the company for its operations.
Secured loans are beneficial to both the lender and borrower. For the lender, the assets used to secure the loan serves as the second way out for repayment of the loan if and when the borrower defaults. As for the borrower, he would have the opportunity of raising funds against his assets while he still retains the ownership of the asset which he would have sold if the loan option was not available.
