Secured loans are loans where the borrower promises certain property/ies recognized as collateral to the person he/she is borrowing funds from known as the creditor. Collateral ensures creditors interest to acquire their money back in case borrowers default on their payment. The value of the loan regularly dictates the suitable collateral to be pledged. If the loan is considered a high cost loan, the collateral pledged should be valued approximately the equivalent as the value of the loan. Creditors who grant higher loans often require collateral to guarantee they are going to get their money back.
The limited power over a pledged property provides a sense of security for creditors. 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 get a more flexible and even a relaxed manner of payment. He may also be permitted to acquire a separate loan while still under contract to the current loan. For the creditor, he would still get his money back in case the borrower fails to pay a certain amount of the loan.
In any secured loan venture, there is also a risk that comes with it. 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 risk it poses to the borrower is the potential loss of his home.
An example of a common secured loan is a mortgage loan. Benefits and risks go both ways for the creditor and borrower. A large amount of money is needed to buy or build a home and mortgage loans come into play. The same asset which the loan is paying for will also be the one used as collateral. If the lendee is unable to sustain payment for the mortgage due to job-loss or disability, possible foreclosure may happen. For the lender of the loan, his insurance is the pledged real property but there is no certainty when he will get the full amount he lent to the borrower back. 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.
What’s more, there should be evidence that the borrower’s asset being collateraled is in his name. To make sure that the borrower is qualified and sincere enough to be granted the loan, creditors make investigations or “credit check.” A secured loan is put into motion in the form of a written contract when the credit check is completed and accepted. Stipulations and conditions are contained therein.
