A Secured loan is a loan where the borrower advances an asset as a security or collateral to the bank or creditor in case he or she defaults or repayments. The collateral can be the asset financed or another asset that the creditor accepts as security. For example, a house mortgaged can be the collateral for a mortgage bond. A contract or agreement is signed by both parties and witnesses, which stipulates the terms of the secured loan, the duration or term, as well as the circumstances under which the asset or security will be repossessed or seized.
Secured loans have several advantages and disadvantages for the borrower and the creditor respectively:
Advantages for the borrower: enjoys low interest rates. Generally secured loans carry lower interest rates than other loans. This is because the risk is minimised by the availability of collateral as recourse to the creditor. Further more the term of repayment may be increased as requested by the borrower.
However, the main disadvantage for the borrower is that should he default or fail to honour his side of the bargain, he loses the asset to the creditor. The creditor takes ownership of the asset and sells it in order to recover the outstanding amount of the loan. The borrower therefore not only loses the security or asset, but also has no recourse, and will not be refunded the amount he already paid.
For the creditor or lender, the main advantage is the seizure of the asset in case the borrower defaults on his repayments. One of the disadvantages is that secured loans normally take longer to repay. It takes a while before the bank recovers the amount loaned.
What comes to most people’s minds when a secured loan is mentioned is a mortgage bond or house loan. However, there are other forms of a secured loan, for example a secured working capital loan to a business. The collateral could be the debtors’ invoices of the borrowing company. In case the business fails to repay the loan, the bank or creditor’s recourse is the receipt from the business’s clients or debtors. The collateral should be equal in value to the loan plus interest.