Secured Loan

Financial Dictionary -> Loans -> Secured Loan

There are times in our lives when we need a loan to acquire things we either want or need. If qualifying for a loan seems difficult or impossible, a secured loan may be an option. The secured loan is less risky for the creditor.

The difference between a secured loan and a regular personal loan is that the secured loan requires "security" or "collateral". The borrower needs to pledge an asset to assure he will repay the loan in good faith. Collateral can be a car or other property. If the borrower defaults on the loan, or fails to pay it, the creditor can then take possession of the item used as collateral and sell it to satisfy the debt owed.

Secured loans are generally available through a bank or credit union. The borrower would apply for it just like any other loan. In some instances, a savings account held at a financial institution can be used as the "security" for the loan. In this case, the money in the savings account, or a portion of it, would be frozen until the loan is repaid. As the borrower pays off the loan, the money in his savings account is freed up. One of the disadvantages of this loan is that it is limited to the amount of money in the borrower's savings account. An advantage is that since the collateral is already in the control of the financial institution, they may offer a lower interest rate to the borrower.

Some types of secured loans in addition to the loan mentioned above are:
- Automobile loan
- Mortgage loan
- Lien

An automobile loan would have the vehicle as collateral, whereas the mortgage loan would be secured by the house or property. While an automobile or mortgage loan could be a lien, a lien could also be a loan secured by furniture, ships or security interests.

A creditor can create a secured loan by using either property the borrower already owns as security or using the items purchased by the loan.