What Are Secured Loans?
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral
for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus
secured against the collateral — in the event that the borrower defaults, the creditor takes possession of
the asset used as collateral and may sell it to regain some or all of the amount originally lent to the
borrower, for example, foreclosure of a home. From the creditor's perspective this is a category of debt
in which a lender has been granted a portion of the bundle of rights to specified property. If the sale
of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency
judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt,
which is not connected to any specific piece of property and instead the creditor may only satisfy the debt
against the borrower rather than the borrower's collateral and the borrower.
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 creditor to
take the property in the event that the debt is not properly repaid. In exchange, this permits the second
purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt,
or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended
at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.
Types of Secured Loans
1. A mortgage loan is a secured loan in which the collateral is property, such as a home.
2. A nonrecourse loan is a secured loan where the collateral is the only security or claim the creditor has against
the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after
foreclosure against the property.
3. A foreclosure is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower.
4. A repossession is a process in which property, such as a car, is taken back by the creditor when the borrower does
not make payments due on the property. Depending on the jurisdiction, it may or may not require a court order.