Secured Loan

Definition

A Secured Loan is a type of loan in which the borrower pledges an asset or collateral—such as properties, vehicles, or other valuable assets—to secure the loan. If the borrower defaults on the repayment, the lender has the legal right to seize the collateral to recover the loan amount. This security reduces the risk for the lender and can often result in more favorable terms for the borrower, such as lower interest rates.

Examples

Mortgage: In a mortgage loan, real estate acts as the collateral. If the borrower fails to make payments, the lender can foreclose on the property.
Auto Loan: The vehicle serves as collateral. Should the borrower default, the lender may repossess the car.
Home Equity Loan: The borrower’s home acts as collateral. Banks can foreclose on the home if the borrower fails to repay the loan.
Secured Personal Loan: Personal assets like savings accounts, certificates of deposit (CDs), or stocks can back these loans.

Frequently Asked Questions

What happens if I default on a secured loan?

If you default, the lender has the legal right to repossess or sell the collateral to recoup the loan amount. This could lead to loss of property and negatively impact your credit score.

How does a secured loan differ from an unsecured loan?

A secured loan requires collateral, while an unsecured loan does not. Secured loans typically have lower interest rates and better terms due to reduced lender risk.

Can I use my car as collateral for a secured loan?

Yes, many lenders accept vehicles as collateral for secured loans, often referred to as auto loans or title loans.

Can the terms of a secured loan be renegotiated?

Yes, terms can sometimes be renegotiated depending on the lender’s policies and your financial situation.

Are secured loans easier to obtain than unsecured loans?

Generally, yes. The collateral reduces risk for the lender, making it easier to secure a loan, especially for individuals with lower credit scores.

Collateral: An asset that a borrower offers to a lender to secure a loan.
Security Interest: A lender’s legal claim to the collateral offered by a borrower.
Foreclosure: The legal process by which a lender repossesses a property when the borrower defaults on the mortgage.
Repossession: The act of taking back collateral on a loan by the lender when the borrower defaults.
Default: Failure to fulfil the legal obligations or terms of a loan agreement, often leading to repossession or foreclosure.

Online Resources

References

“Fundamentals of Financial Management” by Eugene F. Brigham and Joel F. Houston.
“Principles of Managerial Finance” by Lawrence J. Gitman and Chad J. Zutter.

Suggested Books for Further Studies

“Foundations of Finance” by Arthur J. Keown.
“Essentials of Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan.
“Personal Finance” by E. Thomas Garman and Raymond Forgue.

Real Estate Basics: Secured Loan Fundamentals Quiz

### What makes a loan 'secured'? - [ ] The interest rate is fixed. - [x] The loan is backed by collateral. - [ ] The repayment term is under five years. - [ ] The loan doesn't require a credit check. > **Explanation:** A secured loan is backed by collateral, which can be seized by the lender if the borrower defaults. ### Which type of loan is typically backed by real estate? - [ ] Personal loan - [ ] Credit card loan - [x] Mortgage - [ ] Payday loan > **Explanation:** Mortgages are a type of secured loan where the real estate acts as collateral. ### What can happen to your collateral if you default on a secured loan? - [x] It may be seized and sold by the lender. - [ ] It is automatically transferred to a charity. - [ ] It is insured by the government. - [ ] It remains with the borrower without any consequences. > **Explanation:** If you default on a secured loan, the lender can seize and sell the collateral to recover the loan funds. ### Why might a borrower prefer a secured loan over an unsecured loan? - [x] Lower interest rates. - [ ] Easier approval process. - [ ] Smaller loan amounts. - [ ] No credit check required. > **Explanation:** Borrowers often prefer secured loans because they tend to have lower interest rates compared to unsecured loans. ### What is not typically used as collateral for a secured loan? - [ ] Real estate - [ ] Vehicle - [x] Salary - [ ] Savings account > **Explanation:** Salary is typically not used as collateral for a secured loan, whereas assets like real estate, vehicles, and savings accounts are. ### What is the legal claim a lender has to collateral called? - [ ] Interest rate - [ ] Mortgage - [x] Security interest - [ ] Foreclosure > **Explanation:** A lender's legal claim to the collateral is referred to as a security interest. ### What benefit does a lender receive from a secured loan? - [ ] Higher profit margins - [x] Reduced risk of loss - [ ] Better customer rewards - [ ] Increased market share > **Explanation:** A secured loan provides the lender with reduced risk of loss, thanks to the collateral securing the loan. ### What must be provided to secure a personal loan? - [ ] Credit reference - [ ] Interest rebate - [x] Personal asset - [ ] Monthly bank statements > **Explanation:** To secure a personal loan, the borrower must provide a personal asset as collateral. ### If a borrower defaults on a secured loan, what happens to their credit score? - [ ] It is not affected. - [ ] It is slightly improved. - [x] It is negatively impacted. - [ ] It remains the same. > **Explanation:** Defaulting on a secured loan negatively impacts the borrower’s credit score. ### What does 'repossession' usually refer to? - [ ] Foreclosing on a home. - [x] Taking back an asset used as collateral. - [ ] Increasing the loan amount. - [ ] Ending the loan agreement amicably. > **Explanation:** Repossession refers to the lender taking back the asset used as collateral if the borrower defaults on the loan.