A loan in which the borrower pledges some form of asset such as property or a car as collateral for the loan as a result becomes a secured debt which is owed to the creditor who gives the loan, is known as a secured loan. In this way the debt is secured against the collateral and if the borrower fails to pay, the creditor can take possession of the asset used as collateral and is allowed to sell it to settle the loan by retrieving the original amount lent to the borrower, for instance the foreclosure of a house. Seen from the creditor’s point of view this is a type of debt in which a lender gets a part of the rights to the specified property. In contrast to the secured loan/debt is an unsecured loan. In an unsecured loan the creditor can satisfy the loan against the borrower instead of just the borrower’s collateral and is not connected to any specific piece of property.
There are two purposes for a loan secured by debt. The first purpose is served when while giving the loan through security, the creditor is reassured of the financial risks that are involved as it allows the creditor to take the property in case the loan is not properly repaid. Which in turns introduces the second purpose by which the debtors get to receive loans on more favorable terms than that is available for unsecured loan. A secured loan is offered with attractive interest rates and repayment periods.
Types of secured loan-
- A secured loan can be in the form of a mortgage in which the collateral is property, like a house.
- Repossession, a process in which the property, for example a car, is taken by the creditor when the borrower does not make the requisite payments due.
- Foreclosure, a legal process by which the mortgaged property is sold to make good the loan taken by the borrower.
- Another form of secured loan is the nonrecourse loan where the collateral is the sole security the creditor has against the borrower, and thus leaves the creditor with no further option for any shortcoming after foreclosure against the property.
Debt secured by property according to the laws of the United States
Secured loans are far more cheaper than non secured loans and bad credit loans and as such if one could afford to offer additional security this would be a nice option. In cases of real estate a lien is the commonest form of secured loan. Liens may be voluntarily created like a mortgage, or it may also be involuntarily created, like a mechanics lien. For a mortgage to be created the express consent of the title owner is essential which is not needed for filing a mechanics lien. The common procedure for securing a loan is described through the Uniform Commercial Code in case of personal property. A system of forms and public filing of documents which gives details of the creditor’s interest in the property, is made known, is provided by this statute. In case the loan is not properly paid, the creditor may decide to foreclose. Another procedure provided by the same law allows the property to be sold at public auction, or through some other means of sale. The right of redemption is also provided by law, in which a debtor can make arrangement for late payment of the loan but still keep the property. A secured loan is created by a contractual agreement, statutory lien or judgment lien.