Secured Loan
A secured loan is a kind of loan where a material asset is pledged by the borrower to the creditor. This pledged asset is generally known as collateral. Promising a property assures the loan and assures creditors their compensation in case the borrowers fail to pay the cash lent. The collateral being pledged also usually have the equivalent value as the loan being extended. If the loan is considered a high cost loan, the collateral pledged should be valued almost the equivalent as the value of the loan. This practice is very common among creditors to guard their assets and to ensure payment will be given to them.
The limited power over a pledged property provides a sense of security for creditors. The confidence given to creditors by collaterals also bring forth the regulations in setting loan limits and interest rates.
The benefit of a secured loan to the borrower is that it permits him/her to get a more flexible and even a relaxed mode of payment. He may even be open to get another 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 result of payment default.
In any secured loan venture, there is also a risk that comes with it. Even though creditors are ensured of getting back the unpaid borrowed asset via the borrower’s collateral, it still does not guarantee them that they will get the same sum they have lent by selling the borrower’s pledged asset. The risk it poses to the borrower is the possible loss of his home.
An example of a popular secured loan is a mortgage loan. Benefits and risks go both ways for the creditor and borrower. A large amount of money is needed to buy or build a home and mortgage loans come into play. The same asset which the loan is paying for will also be the one used as 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. To make sure that the borrower is capable and honest enough to be granted the loan, creditors make investigations or “credit check.” If the credit check passed, a go signal is given and the secured loan is granted in the form of a written contract.
