What Is A Secured Loan | Types of Secured Loans

What is A Secured Loan?

A secured loan is a type of loan that involves the pledging of an asset as a collateral for the loan. The types of assets to be pledged as collateral may be a house, a car, a property, or a boat. The person who pledges one of his assets is called the debtor while the person who lends his money to the debtor is called the creditor. The asset serves as an assurance that the debtor will eventually pay back the creditor.

What happens when the debtor fails to pay the secured loan?

In the event that the debtor fails to pay for the loan, the creditor will be given the ownership rights to the asset that was used as a collateral. This event is called a default. A default describes the failure of the debtor meet his obligations that are specified in the terms and conditions of the loan contract. The different causes of a default include the violation of the loan covenant, the late payment of the loan , and the unwillingness of the debtor to pay for the loan. Since a default shifts the ownership of the asset from the debtor to the creditor, the creditor actually has the right to sell the asset if he wants to.

What are the advantages of a secured loan?

Debtors have higher chances of being approved of a loan if they pledged one of their assets as a collateral. As compared to an unsecured loan, a secured loan is not only considered to be less risky but also more preferable since the creditor is assured of being repaid of the money he lent. In addition to this, debtors of secured loans are also more likely to loan a larger amount of money. Pledged assets with higher monetary values can be used by the debtors to ask for bigger loan amounts from the creditors.