Secured Debt

“Debt” refers to an amount of money that one party borrows from another. Many individuals and corporates borrow finances from banks, venture capitalists, investors and other unregistered lenders with the promise of repaying the money with interest within a stipulated time.

There are two types of debts that borrowers can accumulate:

  • Unsecured debt
    In the past, borrowers would only borrow money from people they were close to. In most cases, the lenders would lend the money based on the trust they had on the borrower. Today, this form of lending, where lenders take no security in lieu of the debt and lend the money based on the borrower’s creditworthiness is known as unsecured lending and the debt racked up is called an unsecured debt.
    Credit card debt is a great example of an unsecured debt. If you fail to pay your credit card bills, the bank has no option to recover the money by selling your personal property.
  • Secured debt
    As the process of lending money became a commercial venture, lenders needed to take active steps to protect themselves from potential losses. Thus started the trend of secured lending. Here, the loan is taken by giving a personal property or belonging in lieu of the debt. This type of secured debt is also known as a collateral loan – a loan taken by keeping something collateral.
    A housing loan is the perfect example of a secured debt. Homeowners need to pledge their home ownership documents to the bank, in order to be eligible for the loan. If they are unable to repay the money borrowed, their home and all the mortgaged personal property will be seized, auctioned and the money recovered.

Why are secured loans favorable?

  • To lenders
    Secured loans are highly favorable to lenders due to the added security they add to the money lent. No borrower wants to have his mortgaged property seized. As a result, he/she will work extra hard to repay the money borrowed. This way, lenders are assured that borrowers will repay their money.
  • To borrowers
    While unsecured loans seem safer for borrowers, they are extremely heavy on the pocket. Secured loans, on the other hand, have very low-interest rates and allow borrowers to make much-needed savings. Additionally, it is easier to get bigger loans and better credit terms through secured loans.

Things you can use as collateral for your secured loan

Banks and federal credit unions accept the following property as collateral for secured loans:

  • Land & building
  • Automobiles
  • Savings account
  • Certificate of deposit
  • Stocks & bonds
  • Jewelry
  • Accounts receivable and promissory notes