Secured Loan
A secured loan is a kind of loan where a tangible asset is pledged by the borrower to the creditor. This pledged asset is generally known as collateral. Collateral ensures creditors interest to get their money back in case borrowers default on their payment. The collateral being pledged also usually have the similar cost as the loan being extended. The higher the amount of the loan, the value of what the collateral should be more or less equal the loan granted. Creditors who offer higher loans often require collateral to guarantee they are going to get their money back.
Although limited, the creditor pretty much have the right over a pledged property in a secured loan. The confidence given to creditors by collaterals also bring forth the rules in setting loan limits and interest rates.
To the benefit of the borrower, a secured loan allows him to acquire a flexible, extended and relaxed term. He may also be permitted to get a separate loan while still under contract to the current loan. The benefit particular to the creditor by a secured loan is obviously the value of the collateral recompensing for any unpaid loans.
In any secured loan venture, there is also a risk that comes with it. In the event of default of payment, the borrower’s pledged asset may diminish in value and the creditor may have to settle for a lower value by the time he has to sell it. The risk it poses to the borrower is the possible loss of his home.
One of the most popular secured loans known all over the world are mortgage loans. Both borrower and creditor have much to gain or lose. The borrower pledges the same home or property he’ll be living in to the same loan he is paying it for. In the event he defaults on his mortgage payment, foreclosure of his home is due to occur anytime soon. 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 qualified 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.
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