Secured loans are loans where the borrower promises specific property/ies acknowledged as collateral to the person he/she is borrowing capital from known as the creditor.  Collateral ensures creditors interest to get their money back in case borrowers default on their payment.  The collateral being pledged also usually have the matching cost as the loan being given.  The higher the amount of the loan, the value of what the collateral should be more or less equivalent to the loan granted.  Secured loans is the most favored and most popular loaning process amongst creditors as it assures them of a definite payment.

Although limited, the creditor pretty much have the right over a pledged property in a secured loan.  The confidence given to creditors by collaterals also bring forth the rules in setting loan limits and interest rates.

To the benefit of the borrower, a secured loan allows him to acquire a flexible, extended and relaxed term.  He may also be allowed to obtain a separate loan while still under contract to the current loan.  Needless to say, the benefit to the creditor is much in his favor since he will still gain from the borrower’s pledged asset in the result of payment default.

In any secured loan venture, there is also a risk that comes with it.  In the event of default of payment, the borrower’s pledged asset may diminish in value and the creditor may have to settle for a lower value by the time he has to sell it.  The gravity of the situation for borrowers is even more heavier if they are unable to sustain payment since they can lose a vital asset such as a home or property.

A mortgage loan is one popular example of a secured loan.  Both borrower and creditor have much to gain or lose.  The reason of getting the mortgage loan is to pay for a real estate property that the borrower will also use as his collateral.  The home of the borrower may be foreclosed if the borrower fails to pay an accumulated amount for a certain period.  To the lender’s side, it is quite a gamble for him/her to grant loans especially since there’s no sure way to tell if the borrower will be able to complete payment or if the property will be worth the value of the loan if it is foreclosed.  Foreclosure does not necessarily give back the same value when a repossessed home is sold.  Chances are the selling price of the home may be lower than its original selling price paid for by the loan.

Furthermore, for a secured loan to take place, the property being pledged by the borrower should be in his own name.  A credit check is usually conducted by the creditor to check whether the person who is trying to take out a loan from him not only has the financial capacity to make payments but also prove that he is the title-holder of the property being used as collateral.   Once a background check for a secured loan is given the green light, the creditor and borrower form a written contract extending the loan and pledging the property including the terms for default of payment.

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