A secured loan is any type of loan issued based on security – aka ‘collateral’. Lenders issue secured loans based on the value of the borrower’s financial assets.
The most common type of security used in secured borrowing is the applicant’s home, though other assets of value may be considered by specialist lenders. Secured loans are relatively simple agreements, whereby the lender takes ownership of the security (or collateral) if the borrower fails to repay the loan.
A typical example of a secured loan is a mortgage, wherea loan is issued against the agreed market value of the property. As the lender effectively has an insurance policy in the form of the security (in this case the borrower’s home), secured loans can be issued at highly competitive rates.
When the loan is repaid in full as agreed in the contract, the lien is lifted, and the borrower retains full ownership of their property. If the borrower defaults on their loan or breaches their contractual obligations, the lender may begin the process of seeking repossession of their home.
Therefore, it is of the utmost importance for secured loan applicants to understand their obligations and carefully consider their budgets, before entering into a secured loan agreement of any kind. Most secured loans are long-term agreements and must be approached with due care and attention to limit the risk of forfeiture of assets.