Everything about Secured Loan totally explained
A
secured loan is a
loan in which the borrower pledges some asset (for example a car or property) as
collateral for the loan, which then becomes a
secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower
defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower. From the creditor's perspective this is a category of
debt in which a lender has been granted a portion of the
bundle of rights to specified property. The opposite of secured debt/loan is
unsecured debt, which isn't connected to any specific piece of property and instead the creditor may satisfy the debt against the borrower rather than just the borrower's collateral.
Purpose
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the
creditor to take the property in the event that the debt isn't properly repaid. In exchange, this permits the second purpose where the
debtors may receive
loans on more favorable terms than that available for
unsecured debt, or to be extended
credit under circumstances when
credit under terms of
unsecured debt wouldn't be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.
Types
One popular type of secured loan that's normally only available at a bank or credit union is the savings secured loan. In this type of loan, the borrower must have a savings account with the creditor. A portion of the money in this account is used as collateral to secure a loan equal to the amount pledged. This money is then frozen in the account but continues to earn interest. As the loan is repaid the secured portion of the savings account is freed. This has advantages for both the creditor and the borrower. If the borrower defaults on the loan the collateral is already in the creditor's possession so it's a very low risk. As a result, the creditor usually offers a much lower interest rate. The disadvantage of this type of loan is that it's limited by the available fund in the savings account.
A
mortgage loan is a secured loan in which the collateral is property, such as a home.
A
nonrecourse loan is a secured loan where the collateral is the only security or claim the creditor has against the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after foreclosure against the property.
A
foreclosure is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower.
A
repossession is a process in which property, such as a car, is taken back by the creditor when the borrower doesn't make payments due on the property. Depending on the jurisdiction, it may or may not require a court order.
United States Law of Debt Secured by Property
In the case of
real estate, the most common form of
secured debt is the
lien. Liens may either be voluntarily created, as with a
mortgage, or involuntarily created, such as a
mechanics lien. A
mortgage may only be created with the express consent of the
title owner, without regard to other facts of the situation. In contrast, the primary condition required to create a
mechanics lien is that
real estate is somehow improved through the
work or
materials provided by the person filing a
mechanics lien. Although the rules are complex, consent of the
title owner to the
mechanics lien itself isn't required.
In the case of
personal property, the most common procedure for securing the
debt is described through the
Uniform Commercial Code or UCC. This
statute provides a system of forms and public filing of documents by which the
creditor's interest in the
property is made known.
In the event that the underlying
debt isn't properly paid, the
creditor may decide to
foreclose the interest in order to take the
property. Generally, the law that allows the
secured debt to be made also provides a procedure whereby the property will be sold at
public auction, or through some other means of sale. The law commonly also provides a
right of redemption, whereby a debtor may arrange for late payment of the
debt but keep the property.
How to create secured debt
Debt can become secured by a
contractual agreement,
statutory lien, or
judgment lien. Contractual agreements can be secured by either a
Purchase Money Security Interest (PMSI) loan, where the creditor takes a security interest in the items purchased (for example vehicle, furniture, electronics); or, a
Non-Purchase Money Security Interest (NPMSI) loan, where the creditor takes a security interest in items that the debtor already owns.
Further Information
Get more info on 'Secured Loan'.
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