Secured loans are loans in which the borrower signs over some form of personal property over to the lender or bank. If contractual obligations are not met by the borrower, the creditor will then take the personal property as their own and sell it to cover the outstanding amount on the loan.
The personal property that is held as security against a loan usually includes assets like a car that is fully paid for or even a house, depending on the size of the loan. If the full amount is not covered with the sale of the property, the bank or lender may obtain a deficiency judgement against the borrower for the remaining amount. A deficiency judgement is a court order to the borrower to pay the amount due to the bank or lender after the property has been repossessed and sold.
With a secured loan, the borrower is likely received a larger amount than they would with an unsecured loan. This is because the banks and lenders, have less of a risk of not getting paid, the full amount. The loan may also be more favourable to the borrower in the sense that lower monthly instalments are required, and a lower interest rate may be charged.
Secured loans are more commonly taken out as business loans and the security required is usually a house. This means that if the business fails and no money can be paid towards the loan, the borrower will lose his home.
Secured debt usually takes longer to finalise because of the contract that must be set up to address each situation on its individual merits. The contract must be signed, and both parties must agree on which property the banker or lender will take possession of in case of nonpayments.
The good news is that if the secured loan is paid in full and all contractual obligations are met, the property will once again return to the ownership of the client. The client will also have nurtured a reputation as a good payer.