What is secured lending?
Securing lending is when the borrower is required to give the lender collateral as a form of insurance against defaulting on the loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup its loss.
Some loans are automatically secured because of the nature of the loans. With a home mortgage or a car loan, for example, the lender can seize the mortgaged home or the financed vehicle to recoup the money owed.
A secured loan reduces risk because the lender knows it can use the collateral to protect against financial loss. Lenders will not extend unsecured credit to the unproven or risky borrower, but they might offer secured credit because it gives them a way to protect their investment.
A secured loan also offers benefits to borrowers, especially those who can’t obtain an unsecured loan.
- A borrower can use a secured loan to build credit if he doesn’t have a credit history or if he has poor credit due to past financial recklessness or misfortune.
- Secured loans have lower interest rates because the lender is taking on less risk.
- With a secured loan, the borrower may be able to get a bigger loan and a longer term to pay it off.
To get a secured loan, a borrower usually needs significant collateral to back it. Because lenders count on it as insurance, the collateral often has to be worth more than the loan amount.
Secured lending example
Mick took out a mortgage, a loan that was secured by the house he bought. After six months, he quit making his mortgage payments. The lender ended up foreclosing on the home and selling it to get back the money Mick failed to pay.
Find out how a secured credit card can help you build a solid credit history and improve your credit score.