Secured Loan
Secured loans are loans where the borrower promises certain property/ies known as collateral to the person he/she is borrowing money from known as the creditor. Promising a possession secures the loan and assures creditors their compensation in case the borrowers fall short on paying the funds lent. The collateral being pledged also usually have the matching cost as the loan being extended. If the loan is considered a high expense loan, the collateral pledged should be valued about the same as the value of the loan. This practice is very common among creditors to protect their assets and to ensure payment will be given to them.
Although limited, the creditor pretty much have the right over a pledged property in a secured loan. The confidence given to creditors by collaterals also bring forth the regulations in setting loan limits and interest rates.
The benefit of a secured loan to the borrower is that it permits him/her to obtain a more accommodating and even a relaxed mode of payment. In some cases, borrowers who are still obliged under a current secured loan are allowed to get another loan. Needless to say, the benefit to the creditor is much in his favor since he will still gain from the borrower’s pledged asset in the event of payment default.
In the financial world, every benefit comes with a risk. In the event of default of payment, the borrower’s pledged asset may reduce 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 vital asset such as a home or property.
A mortgage loan is one popular example of a secured loan. Both borrower and creditor have much to gain or lose. The borrower pledges the same home or property he’ll be living in to the same loan he is paying it for. In the event he defaults on his mortgage payment, foreclosure of his home is due to occur anytime soon. To the lender’s side, it is quite a gamble for him/her to grant loans especially since there’s no sure way to tell if the borrower will be able to complete payment or if the property will be worth the value of the loan if it is foreclosed. 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 ability to make payments but also prove that he is the owner of the property being used as collateral. Once a background check for a secured loan is given the green light, the creditor and borrower form a written contract extending the loan and pledging the property including the terms for default of payment.
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