Secured Loans Explained

In order to qualify for a secured loan the borrower has to be able to pledge some form of asset against the loan, this could be equity in a house, a car or some other item of a value that equals or exceeds the value of the loan amount (usually exceeds).

The debt then becomes secured and the money is owed to the credit source who gives the loan, this could be a bank or loan company.

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Should the borrower subsequently default on the loan and fails to make the necessary payments then the lender has the right to take possession of the asset in order to recover the value of the loan amount.

The main difference between a secured loan and an unsecured loan is that the debt is satisfied against the borrower's collateral for a secured loan, whereas for an unsecured loan the only course of action is to try and satisfy the debt against the borrower, in other words the lender will try and sue the borrower for the amount of the outstanding debt.

Clearly a secured loan is much less of a risk to the lender and consequently the rates for a secured loan will be more favorable than the rates for an unsecured loan.

This can actually make the difference between whether the loan is made or not in the first place. People with bad credit scores can struggle to obtain a loan that is not secured and sometimes have to resort to taking loans that have very high levels of interest over very short loan periods, these types of loans are sometimes referred to as 'Payday Loans' and fit very much in the category of unsecured loans.

A typical type of secured loan is a mortgage, where the loan is secured against a property usually the borrowers home. The borrower should be aware that failure to meet the terms of the loan agreement could result in them loosing their home.

The house would be repossessed and then sold under the control of the lender in order to repay the debt, this process is referred to as 'foreclosure'.

A 'nonrecourse' loan' is a loan where the collateral used is the only security for the debt with no further claims against the borrower. In other words if the sale of the collateral fails to pay off the debt then that is the problem of the lender and the borrower has no further recourse and cannot be forced to make up the shortfall.