Secured loan is a kind of loan wherein the borrower pledges some real estate as a security or collateral to get some loan. It becomes a secure loan for the lender as he is secured through the collateral that he will be able to get the lent money back at the amortization. As the debt is secured against the collateral, in any event when the borrower defaults, the creditor may take the possession of the asset used as collateral.
Moreover, the property given as collateral for the loan may even be sold to satisfy the debt by regaining the amount originally lent to the borrower. In the USA mortgage market, the home pledged as collateral is asked for foreclosure so that lender can get his lent money back. Whereas in unsecured loan there is no collateral and is not connected to any specific piece of property, the creditor may satisfy the debt against the borrower rather than just the borrower’s collateral, in secured loan such is not the case.
In nutshell, the collateral works as a lien. A lien in legal lexicon is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. Whereas the owner of the property, who grants the lien, is called ‘lienor,’ the person who has the benefit of the lien is termed as the lienee. Secured loans can be of various types which depend upon the kind of security submitted.
In a mortgage loan when the collateral is given as a property and the loan is not paid back, the lender may ask for foreclosure. The process of foreclosure involves selling of the property given on collateral to meet the loan amount of the lender. One other kind of secured loan is nonrecourse loan where the collateral is the only security or claim the creditor has against the borrower.
In nonrecourse loan, the creditor does not have any other option against the borrower for any deficiency remaining after foreclosure against the property. Whereas a lender has foreclosure as an option to get back his lent money, he also has an option to ask for repossession. Repossession is a process in which the property given as collateral is taken back by the creditor when the borrower does not make payments due on the property. However, the creditor requires having a court order to keep the property.
Secured loan can be taken for various options depending upon the specific requirements of the borrower. Borrowers opting for a secured loan try to extend the loan through securing the debt as the lender is relieved of most of the financial risks involved. Lenders feel secured as the collateral works as a security and in any default on payment, he can go for foreclosure or repossession.
Another advantage of secured loan is that borrowers can get a loan at attractive rate from lenders after offering some real estate as security. Secured loans have low interest rates in comparison to unsecured loans which can work as a major motivation for a borrower to opt for a secured loan. Moreover, the payment period may be a convenient one in secured loan and borrower can agree for suitable time.
