A secured loan is a type of loan that requires the borrower to guarantee an asset such as a vehicle or property as a security for the borrowed money. For secured home or auto loans, the asset bought with the borrowed money can also be used as a security. In this matter, the lender may have proprietorship to the asset until the debt is repaid completely with the interest charges. If the debtor fails to repay the debt, the creditor may obtain title to the asset offered as a security. Items like stocks and bonds can also be collateralized.
Financial institutions usually offer different types of secured loans. Different types of secured loans comprise of secured credit cards, see here, non-recourse loans, foreclosure and repossession. For mortgage loans, the house is provided as collateral to the debt. If the debtor fails to pay back a mortgage loan, the debtor may forfeit the house. Non-recourse loans claim only the collateral in the case of default by the borrower.
Secured loans are usually in the form of a vehicle, jewelry or stocks. In the case of default on a foreclosure loan, the lender resells the property to claim for lost money. Foreclosures are applicable only to property. In a repossession loan, the creditor may trade the car to cater for his loss.
It is necessary for the creditor to collateralize a debt due to the probability of nonpayment by the debtor as the creditor cannot advance cash based on verbal assurance only. Hence, collateralizing the debt is a secure method for the creditor to advance a big debt. Additionally, when the debt is pledged to your house, the debtor makes sure that the loan is paid back, so that he obtains the title to his own house.
Moreover, when a loan is secured using an asset, lenders usually charge an interest rate that is lower than that of an unsecured loan. This is because in the event of nonpayment by the debtor, the creditor can claim a major part of the advanced money obtaining title to the collateralized item.
Creditors may also allow the debtors to prolong the debt term between 5 to 30 years. This offer is feasible for borrowers who do not want to burden their monthly expenses by a large monthly bill and like to spread their repayment over a longer period of time. This results in a higher interest which intensifies the overall amount of the debt. Mostly secured loans are thought to be very lucrative because of their ability to make adjustments in the duration of the debt and reduced interest rates.