Secured Loan
A secured loan is a type of loan where a physical asset is pledged by the borrower to the creditor. This pledged asset is frequently known as collateral. Pledging a property secures the loan and guarantees creditors their compensation in case the borrowers fail to pay the money lent. The collateral being pledged also usually have the equivalent value as the loan being given. The higher the amount of the loan, the value of what the collateral should be more or less equal the loan granted. Secured loans is the most preferred and most popular loaning system among creditors as it assures them of a guaranteed payment.
Once a property has been pledged, the creditor practically has power over it from that point on, although it is only limited. Collateral brings a feeling of confidence for creditors in providing loans in accordance to setting the interest rate and loan limit.
The benefit of a secured loan to the borrower is that it allows him/her to obtain a more accommodating and even a relaxed manner of payment. He may even be open to get a new loan (secured or unsecured) given that the present loan is going smoothly. The benefit particular to the creditor by a secured loan is obviously the value of the collateral recompensing for any unpaid loans.
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.
One of the most popular secured loans known all over the world are mortgage loans. The outcome could either be a winning situation or a losing situation. The purpose of getting the mortgage loan is to pay for a real estate property that the borrower will also use as his collateral. If the lendee is unable to sustain payment for the mortgage due to job-loss or disability, possible foreclosure may happen. 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. Whether the borrower will be able to sustain payments or if foreclosure is bound to occur, there’s no certainty if or when the foreclosed home will be sold at the same value.
In addition to securing a collateral, the borrower’s name should appear as the owner of the equity since creditors will not accept pledges from borrowers that do not bear their own 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 fiscal ability to make payments but also confirm 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 together with the requisites for default of payment.
Filed under: General Interest