What are Secured Loans
Secured loans represent a type of loans for which the borrower has to pledge an asset such as a vehicle or home as collateral. In case of default, the property can be claimed by the lending institution as to pay off the loan. The collateral decreases the risk taken by the creditor, and the latter holds the title or deed until the borrowed amount is paid off in full, including all applicable fees and interest.
Getting a secured loan is typically the best way to obtain a large sum of money quickly. The creditor is unlikely to loan a considerable amount without some form of collateral. Pledging one’s home or other valuable asset is a safe guarantee that the borrower will do everything in his or her power to pay off the loan.
Secured loans are not intended for new purchases only. They can be in the form of home equity lines of credit, home equity loans, or second mortgages. These loans are based on the amount of the borrower’s home equity, which represents the home’s value minus the owed amount.
Another type of secured loan is the debt consolidation loan whereby a personal property or real estate is used as collateral. Rather than making multiple, high interest payments every month, the loan is granted to pay the original creditors. The borrower is left repaying only one loan. This type of arrangement is very convenient as it saves time and money, with interest rates on debt consolidation loans being lower. Another advantage is that the loan comes with lower monthly payments.
The non-recourse loan is also in the category of secured loans whereby the collateral represents the only claim or security the lender has against the borrower. After foreclosure, the lending institution has no other recourse if there is any deficiency remaining. In other words, the borrower is not considered personally liable. Because of the higher risk involved, non-recourse loans are usually limited to 60 or even 50 percent loan-to-value ratios, and the property is what provides the "overcollateralization" of the non-recourse loan. This type of loan is usually used for the financing of commercial real estates or other projects that involve long loan periods, high capital expenditures, and uncertain streams of revenue.
In the United States, the Uniform Commercial Code stipulates the rules of securing debt in case private property is involved. The statute establishes a system for public filing of documents whereby the interest of the creditor in the property is made known.
If the underlying debt cannot be properly paid, the lender may foreclose the interest as to take possession of the property. In general, the acting law which provides for granting secured loans also includes a procedure through which the property may be sold at a public auction. The law accords a right of redemption that allows the borrower to arrange for late debt payment while keeping his or her property. Typically, debt is secured by a judgment lien, statutory lien, or contractual agreement. Contractual agreements are secured by Non-Purchase Money Security Interest or Purchase Money Security Interest. In the first case, the creditor will take interest in valuables that are already owned by the borrower. With Purchase Money Security Interest, the lender takes interest in purchased items such as electronics, furniture, or a vehicle.