Secured loans are the ones that require some asset or property as collateral against the money extended. This pledge of property makes the loans secure and ensure payment for the creditor. Collateral may vary depending on the type and amount of the loan obtained. A property or an asset equaling in worth of the amount of the loan is taken as collateral. A purpose of such a security is to secure the loan and to ensure the creditor that his loan will be repaid.

Rate of default is great when it comes to loan repayment, so this is a way of ensuring that no such default would occur. An agreement between the borrower and the lender gives the right to the creditor over the property pledged. The terms of the contract states as to when a borrower is considered a defaulter and how and when the property pledged could be used to pay off the loan.

When a property or an asset is pledged it gives the creditor the right over that. In this manner a creditor becomes confident in extending the loan and he sets the loan limit and the interest rate accordingly.

Secured loans are beneficial for both borrowers and creditors. In case of the creditor, he is saved from the risks involved in lending money to the borrower because he has the surety that if the borrower defaults to pay, there is a back up property to recover the amount from. For the borrowers, it is beneficial because when a credit is confident of repayment, he extends loans on more flexible and relaxed terms to the borrower.

There are many forms of secured loans such as a mortgage or auto loan. In mortgage, collateral is a tangible property such as a house. An auto loan is one in which an automobile is taken on credit. In this case, collateral is the automobile itself.

In the case of the above mentioned loans, the property or asset pledged is disposed off to repay the loan in case the borrower defaults to make the payment. If a borrower defaults to make a payment in case of a mortgage loan, the property is sold to make the payment. This process is called foreclosure.

As for the auto loans or car loans, if a borrower defaults, his property i.e. the automobile is taken from him. This process is called repossession. While extending an auto loan, credit worthiness of the borrower is checked and then the loan is extended keeping in view the financial capacity of the borrower. In case of default, the automobile is repossessed.

There are many laws for the loans secured by property so that a fixed set of procedures are carried out in order to recover the loan amount. These laws provide security to the creditor so that their right is not violated by the borrower.

When a loan is secured by some property, it is necessary that the property pledged by the borrower is in his own name. A borrower does not have any right to pledge someone else’s property for obtaining loan for him. Therefore while extending a secure loan; a proper credit check is undertaken. An enquiry is made to ensure that the person pledging the property possess the title of that specific property. Once the enquiry into the title of the property is made and the credit worthiness of the borrower is checked, a written contract is formed between the borrower and the creditor, pledging the property and extending the loan. All the details as to the repayment and actions in case of default are written there in.

Therefore secured loans are more popular among the creditors as they give them more security. So a secured loan is

1.    Secured by a property
2.    Provides security to the creditor
3.    Beneficial for both borrower and creditor
4.    Is offered on more flexible terms
5.    Creditor’s risk is lowered as compared to unsecured loans