A secured loan is a kind of loan where a physical asset is pledged by the borrower to the creditor. This pledged asset is commonly known as collateral. Promising a possession safeguards the loan and guarantees creditors their compensation in case the borrowers fail to pay the money lent. The collateral being pledged also usually have the matching value as the loan being given. If the loan is considered a high expense loan, the collateral pledged should be valued about the same as the value of the loan. Secured loans is the most favored and most common loaning process amongst creditors as it assures them of a guaranteed payment.
Although limited, the creditor pretty much have the right over a pledged property in a secured loan. The confidence given to creditors by collaterals also bring forth the policy in setting loan limits and interest rates.
The benefit of a secured loan to the borrower is that it permits him/her to acquire a more accommodating and even a relaxed means of payment. He may even be open to get an additional loan (secured or unsecured) given that the existing loan is going smoothly. Needless to say, the benefit to the creditor is much in his favor as he will still gain from the borrower’s pledged asset in the event of payment default.
In any secured loan venture, there is also a risk that comes with it. In the event of default of payment, the borrower’s pledged asset may diminish in value and the creditor may have to settle for a lower value by the time he has to sell it. The risk it poses to the borrower is the potential loss of his home.
An example of a popular secured loan is a mortgage loan. The result could either be a winning situation or a losing situation. The reason of getting the mortgage loan is to pay for a real estate property that the borrower will also use as his collateral. The home of the borrower may be foreclosed if the borrower fails to pay an accumulated amount for a certain period. For the lender of the loan, his insurance is the pledged real property but there is no certainty when he will get the full amount he lent to the borrower back. Foreclosure does not necessarily give back the same value when a repossessed home is sold. Chances are the selling price of the home may be lower than its original selling price paid for by the loan.
What’s more, there should be evidence that the borrower’s asset being collateraled is in his name. A credit check is usually conducted by the creditor to check whether the person who is trying to take out a loan from him not only has the financial capacity to make payments but also confirm that he is the possessor of the property being used as collateral. A secured loan is put into motion in the form of a written contract once the credit check is completed and accepted. Terms and conditions are contained therein.
