What is a Secured Loan?

Generally speaking, there are two main types of loans: Unsecured and Secured. 

Secured loans are loans which require the potential borrower to provide some sort of collateral –usually an asset like a car, property, or money- in order to secure the loan for the creditor.  By extending credit in this fashion, it relieves the lender of a great deal of risk in the event the borrow defaults on the loan.  In case of default, the lender can take possession of the asset used as collateral and use it to satisfy all or part of the debt, and a deficiency judgment can be obtained against the borrower for any outstanding amount.  A good example of this is a home mortgage.  A mortgage is basically a secured loan with a house or other property used as collateral.   The borrower agrees to make the required payments, knowing that if they fail to meet their obligations the lender can retake the property and sell it to recoup the costs of the loan.  If there are any additional costs beyond what the lender receives for the property, they can pursue the original borrower in order to recoup those costs. 

An auto loan in Singapore is another example of a secured loan; if the borrower falls behind on their car payments, the lender repossesses the vehicle and may sell it to recoup the costs of the initial loan.

In exchange for the borrower providing collateral, the lender may also be able to extend credit, or offer more attractive interest rates and repayment options to borrowers who might not otherwise qualify for these benefits.  An example of this is a secured credit card.  Many banks offer secured credit cards to individuals whose credit history is shaky or nonexistent.  These borrowers are seen as a higher credit risk, so their options for borrowing are fewer than someone with better credit.  However, if they provide collateral, the bank will issue them a credit card.  Typically this is done by depositing funds into a secured bank account associated with the credit card.  The credit limit will reflect the amount in that secured account, and if the borrower is unable to pay their credit card balance, the funds in the account can be used to recoup the amount owed on the card.

May 10, 2016