Secured Loan

Secured Loan:

What is a Secured Loan?

A Secured Loan is a loan in which the borrower of the principal puts forth or pledges an asset or assets as collateral against the loan. This collateral secures the loan against defaults, as the creditor can legally  repossess the object held in collateral. The collateral must be of similar value to the loan itself as the amount of the principal needs to be reclaimed in case of a default. However if the sale of the collateral is not enough to cover the expenses left on the balance, the creditor can attempt to issue a deficiency judgement which will attempt to collect the remaining amount.

Securing a loan with collateral normally allows for greater leeway within the terms of a loan. For instance obtaining collateral may raise the limit a lender is willing to loan or decrease the interest rate. Debt can be secured a number of other ways including a contractual agreement, a statutory lien, or a judgement lien. Contractual agreements can then me secured by either a Purchase Money Security Interest (PMSI) loan where the creditor takes a security interest in the items purchased in the lieu of the loan, or a Non-Purchase Money Security Interest (NPMSI) where the lender takes a security interest in items already owned by the individual borrowing the loan.

When referring to real estate a secured debt is most commonly secured by a lien. The lien can either be voluntarily assumed as with a mortgage or involuntarily assumed. This means that only with permission from the title owner can a mortgage be filed. But in the case of an involuntary lien such as a mechanics lien, the real estate is improved by the work and therefore some of the value is ascribed to the contractor who preformed the work on the property.