The term secured loans refers to any form of financing for which a borrower puts up property as collateral or security. With a secured loan, the lender has the right to take possession of the property if the borrower does not pay off the loan.
There are a wide variety of secured loans available today. These loans range from pawn loans to mortgages on property, to complex financing arrangements for business finance based on invoices. Almost all consumers today have some sort of secured loan.
The advantage to secured loans is that the terms are not as rigorous as for other loans. Lenders are more willing to make these loans because there is a greater chance they can recoup their losses if the borrower defaults.
The most basic kind of secured loan is a pawn loan. With this kind of loan, a person turns a possession over to a pawnbroker who makes them a loan. If the borrower does not pay the loan off with interest within the period specified in the agreement, the pawnbroker has the right to sell the item.
Another popular secured loan is a car or vehicle loan. A vehicle loan is a secured loan because the lender retains title to the vehicle. This gives the lender legal ownership and the right to repossess the automobile.
Mortgages work much like auto loans. In a typical mortgage, the lender retains legal ownership of the property involved. The borrower gets the right to use the property as long as he or she makes the mortgage payments. When the mortgage principal is paid, the borrower gets full ownership of the property. A mortgage is a secured loan because the mortgage company retains ownership of the property as collateral.
There are an almost infinite number of secured business loans available because it is possible to use almost any item of value as collateral in such an arrangement. In most secured loan arrangements, the lender has some sort of right or control over the object of value put up as collateral.
A good example of a secured business loan is an accounts receivable loan. In this arrangement, a business puts up its unpaid or collectible invoices as collateral for a loan or line of credit. Many businesses, especially small businesses, take advantage of this kind of loan.
There are also many secured loans in which business owners put up partial ownership of the business, or a security interest, as collateral for loans. A similar arrangement is a hard money loan, in which a business pledges part of its future income as collateral for a loan. Another popular loan for business is an inventory loan in which inventory serves as collateral.
The big advantage to secured loans is that often, no credit check or credit history is required to get one. The car dealers who sell vehicles to those with bad credit who have a job or some other source of income are a good example of this.
Secured loans are often the only kind of credit available to the poor or persons with bad credit. Pawnbrokers and payday or check lenders who issue loans based on checks are examples of secured lenders who lend to the poor. In such an arrangement, an individual's future income serves as collateral.
The biggest disadvantage to secured loans is that the borrower will lose the collateral if he or she cannot pay the loan. Another disadvantage is that many secured loans come with much higher interest rates than other loans.
There are many different types of secured loans available today. All of these methods of financing work on much the same principle.
In a secured loan, a borrower puts up something of value as collateral or security. When something becomes collateral, a borrower has the legal right to take ownership of it if the loan is not paid. Every type of secured loan works upon this basic principle.
Even though the principle is much the same, secured loans are administered in vastly different ways. Laws, banking practices, regulations and other factors mean that there are vast differences in the kinds of secured loans out there.
This is only a small sampling of the variety of secured loans out there. There are many other examples of secured loans available because such instruments are one of the most flexible kinds of finance available.