Secured Loan
What Is a Secured Loan?
A secured loan is a type of loan backed by collateral—an asset the borrower pledges to the lender. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the debt.
Why It Matters
Secured loans typically offer lower interest rates and higher borrowing limits because they reduce risk for lenders. However, they also carry the risk of losing valuable assets if payments are missed.
How Secured Loans Work
The process generally includes:
- borrower provides collateral (home, car, savings)
- lender evaluates the asset’s value
- loan terms are issued based on risk and collateral
- borrower makes scheduled payments
- lender can repossess collateral if the loan defaults
Example
A mortgage is a secured loan where the home serves as collateral.
Secured Loan vs Unsecured Loan
- Secured loan requires collateral.
- Unsecured loan does not require collateral but often has higher interest rates.
FAQs About Secured Loans
What can be used as collateral?
Homes, vehicles, savings accounts, or other valuable assets.
Do secured loans have lower interest rates?
Yes, typically lower than unsecured loans.
What happens if you default?
The lender may seize the collateral.
Related Terms
