what is a secured loan?

Car Loan Providers Look At Collateral As Their Biggest Asset

If the secured loan is taken out for purchasing that expensive equipment, an asset as collateral security then collateral security is required. Generally, conservative lenders take collateral security such as land, building, etc as their added security. So what is a secured loan?


The difference between a secured loan and an unsecured loan

is that if the lender fails to deliver the asset then the borrower does not need to return the amount. In the case of nonrecourse loans, the creditor has the right to take away the asset if the borrower fails to repay the debt. However, nonrecourse assets are not pledged against any collateral. Home loans are examples of nonrecourse assets. Since home loans are secured by the asset, a borrower can demand legal action against the lender if he refuses to return the money. To avail mortgage loan, a person is supposed to fulfill the eligibility criteria fixed by the lender.


The lenders usually adopt one or more security options

to guarantee the borrowers for unsecured loans. The most common form of security is to offer your car as collateral. If the borrower fails to return the loan amount then the lender can sell off your car. You may feel reluctant to let go of your car but it is always good to have something in life that you own rather than nothing at all. Another form of security offered by the lenders for secured loans is housed. You can pledge your house against the amount of the loan.


But there is a problem with collateral security

in the case of unsecured loans. Suppose you borrow money and fail to return the amount. The lenders will have no other recourse but to get the asset that you have pledged as your security but it will be very difficult for them to do so as there is no connection herewith your collateral. The only link herewith to your asset is the rate of interest applicable for the loan.


The rate of interest applicable for the secured car loan

will depend on the risk involved in the assets on offer by the lenders. This is because, if the borrower fails to return the amount then his possession of the asset has been forfeited to the lenders. This is very harsh but in this case, the rate of interest applicable for the loan amount will remain high. On the other hand, if you have a bad credit history then you may also be denied an outright loan but you can opt for secured loans. The risk is higher with a bad credit record and the lenders will charge higher rates of interest to compensate themselves for this risk.


Here, we are not talking about any special provision

or a favor provided to the borrower. We are talking about the possibility that if you default on the repayment of a secured loan then the lender has a ready option to sell your asset to cover his financial losses. Lenders feel it is better to keep the asset in their possession rather than allowing the borrower to default. This is because they face a high risk in allowing the borrower to go bankrupt and liquidate his assets to repay the unsecured loan. If the borrower goes bankrupt then the lender faces a huge loss which may lead to a complete loss of his business. The lender shouldn’t allow his debtor to go under the state of bankruptcy.

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