A secured loan is a in which the borrower pledge an asset or item of value as collateral. It can also be termed as a secured debt owed to the lender.
Conversely, a loan without the presence of any collateral is an unsecured loan.
Some common items used as loan collateral include:
- Real estate
- Equipment and machinery
- Stocks and equity
- Antiques and art
When a home buyer request for a mortgage, the loan arrangement is secured with the property by default unless (very rarely) specifically excluded.
While the majority of secured loan requests are for the purchase of the asset that is being financed, they can also come in the form of term loans against fully or partially paid up assets.
This is the same with a home equity loan, home equity line of credit (HELOC), cash out refinance, etc.
Sometimes a borrower is unable to get a credit facility or a requested loan quantum approved by a lender.
However, when assets are pledged as security, these applications can be approved.
This is because when assets are tied as collateral in a loan, the lender would feel more comfortable with financing as these items of value can be liquidated to pay for the amount owed by a borrower should he default and be unable to meet his debt obligations.
An example of which are foreclosures.
With the lesser risks, lenders are also more receptive to grant more attractive interest rates and terms to the borrower.
Interest rates for secured credit facilities in general are cheaper than unsecured loans.
At times when a lender is motivated to acquire a client, it may also make a request for collateral in order to approve a loan facility.
One disadvantage of secured loans is that there almost always is a necessity for a lot of documentation to verify the ownership and value of those said assets.