Secured Loans

This type of loan works differently to an unsecured loan in that the borrower has to pledge a valuable asset, such as a home or car, as collateral against the loan. The idea is that if the borrower defaults on payments, the lending institution has full authority to take possession of the asset that has been presented as collateral, and can sell it in order to settle the debt.

There are essentially two reasons for opting for a secured loan: firstly, it relieves the creditor of the financial risk involved as the bank can seize the client’s assets should the loan not be paid back on time or if other problems arise. Secondly, during the exchange process the borrower will be granted a loan on more favourable terms than if it were an unsecured loan. Due to the fact that collateral serves as protection for the money lent, the borrower has the option of extending the credit and will also be offered lower interest rates and more flexible repayment periods.

Thus, a secured loan is fairly easy for a homeowner to obtain, as the creditor will determine the maximum total that you are able to borrow from your property value or market equity value. Another advantage is that anyone can be considered – even people that are plagued with a bad credit history or have been blacklisted after defaulting on previous account payments.

Even though credit providers will be cautious about lending money to someone with a poor credit record, the chances are significantly higher if you opt for a secured loan. You will be viewed as less of a risk if you can present property or a valuable asset to sign against the money you are borrowing.

Loans According to Needs

The particular kind of secured loan that is best-suited to your individual needs depends on your reasons for taking out the loan in the first place. There are special secured loans for specific purposes which include a home improvement, holiday, car, and a wedding loan. Otherwise a common option is the secured consolidation loan that people use to transform their multiple debts into a single loan to make it more manageable.

Different Levels of Financial Security

After deciding on the appropriate loan for your needs, you will have to scan the different levels of loans that are available that rate according to financial security. The four main ones offered by financial institutions are as follows:

• Non-Recourse Loan

This secured loan dictates that the collateral that has been put down is the only security that the lender has against the borrower. Thus, the creditor has no further recourse against the borrower if the applicant defaults on the loan. The security only extends up to the value of the collateral – whether it is a car, property, stocks, expensive jewellery or even a savings account. If repayments are missed the bank can seize the collateral but the lender’s recovery is limited to the value of that asset. For example, if the asset is insufficient to cover the outstanding loan balance, the borrower will not be liable and the lender will suffer a loss.

• Mortgage Loan

With a mortgage loan the collateral in question is always in the form of property. In simple terms if the applicant is unable to repay the mortgage he or she will lose their property. Although the mortgage itself isn’t classified as a debt, it serves as the lender’s security for a debt. The mortgage is effectively the transfer of an interest in property to a lender as a security for the money lent.

The next two aren’t generally viewed as types of secured loans by the average person, as foreclosures and repossessions operate slightly differently:

• Foreclosure

This is a legal process that involves the sale of mortgaged property in order to pay a debt when the borrower has defaulted on its repayment. It is seen as a secured loan in that it resells the property to return the outstanding amount, and can only be applied when a property is presented as collateral.

• Repossession

In a way repossession is similar to a foreclosure in that the lender can secure lost monies owed by the borrower. The process of repossession means that the property or collateral is seized by the creditor in the event of the borrower missing payments on the loan. This can require a court order depending on the jurisdiction.