Secured loans are loans where the borrower vows specific property/ies recognized as collateral to the person he/she is borrowing funds from known as the creditor. Collateral ensures creditors interest to acquire their money back in case borrowers default on their payment. The collateral being pledged also usually have the matching cost as the loan being given. The higher the amount of the loan, the value of what the collateral should be more or less equal the loan settled. This routine is very widespread among creditors to look after their assets and to ensure payment will be given to them.
The partial power over a pledged property provides a sense of security for creditors. The confidence given to creditors by collaterals also bring forth the policy 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 allowed to acquire a separate loan while still under contract to the current loan. Needless to say, the benefit to the creditor is much in his favor as he will still gain from the borrower’s pledged asset in the occurrence of payment default.
Where there’s benefit, there also comes risk. 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 gravity of the situation for borrowers is even more heavier if they are unable to sustain payment since they can lose a necessary asset such as a home or property.
An example of a popular secured loan is a mortgage loan. The outcome could either be a winning situation or a losing situation. The reason of getting the mortgage loan is to pay for a real estate property that the borrower will also use as his collateral. The home of the borrower may be foreclosed if the borrower fails to pay an accumulated amount for a certain period. 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. A credit check is usually conducted by the creditor to check whether the person who is trying to take out a loan from him not only has the financial capacity to make payments but also confirm that he is the owner of the property being used as collateral. A secured loan is put into motion in the form of a written contract once the credit check is completed and approved. Terms and conditions are contained therein.