What is a Secured Loan?

A secured loan is a type of loan that requires the borrower to provide collateral—an asset that serves as security for the lender. This collateral can be anything of value, such as real estate, vehicles, investments, or other tangible assets. The primary purpose of securing a loan with collateral is to reduce the lender’s risk; if the borrower fails to repay the loan, the lender has the legal right to seize and sell the collateral to recover the outstanding debt.

Advantages of a Secured Loan

A secured loan protects the interests of the lender in situations where there is uncertainty regarding the ability of the borrower to pay back a loan. It can also be used to reduce the interest rate on a loan, since the lender’s risk has been reduced. In addition, a secured loan allows for the extension of funds to borrowers who might not otherwise qualify for a loan.

Disadvantages of a Secured Loan

An overly grasping lender will insist on securing all of a borrower’s assets as part of a loan agreement, which means that the borrower has no remaining collateral that can be used if additional debt is needed. This can result in severely constrained finances, where the borrower is unable to grow the business due to a lack of funds.

Example of a Secured Loan

A home mortgage is a secured loan, since the lender can seize the home in the event of nonpayment and sell it in order to obtain sufficient funds to be repaid.