Know What is a Secured Loan

When you borrow money, your lender may ask for some form of security on the loan. This security can range widely based on your credit history as well as based on the nature of the loan that you are pursuing. It is important to understand the concept of a secured loan and what the different forms of security that are asked for may consist of.

What is a Secured Loan?

A secured loan is a loan that is backed by an asset of some kind. A mortgage loan is secured by the value of the home. If you default on repaying your mortgage loan then you lender can recover their loan by taking over your home and selling it to a third party. Car loans are secured by the value of the car. Other forms of security may be a security deposit put down, a personal guarantee of other assets, or a guarantee by a third party that the lender can try to pursue payment from if you default.

Varying Quality of Security

Not all forms of security are the same on loans. For example, a mortgage loan typically has solid security as the value of real estate tends to increase as time goes on. The value of a car tends to depreciate in value as time goes on and this is a less beneficial form of security for a lender. Personal guarantees will vary based on the credit rating of the guarantor.

Why is Security a Good thing for a Borrower?

It is obvious why a secured loan is a good thing for a lender; it increases the likelihood of repayment. For a borrower it can also be a positive as it often results in a loan be extended at a lower interest rate than they would otherwise offer.