Secured Loans
A secured loan is a loan where the borrower puts up some asset
(like a car or property) as collateral for the loan.
The loan is secured against the collateral — in the event that the borrower defaults,
the lender takes possession of the asset and can sell it to recover the amount
originally lent to the borrower.
Secured loans relieve the lender of most of the financial risks involved in lending,
so he might offer the borrower better terms on interest rates and repayment period.
One particularly attractive type of secured loan
(normally only available at a bank or credit union) is a savings secured loan.
For this type of loan, the borrower does need to have a savings account with the lender.
A portion of the money in the savings account is used as collateral
to secure a loan of an amount equal to that portion.
This portion of money is then frozen in the account (but it still continues to earn interest).
As the loan gets repaid, the secured portion of the savings account
is gradually unfrozen. This is a good deal for both the lender and the borrower.
If the borrower defaults on the loan the lender’s already got the collateral
(the full amount of the loan) which makes it a very low risk for him.
So he usually offers a much lower interest rate as a result.
The disadvantage of course is that it’s limited to the funds available
in the lender’s savings account.
A mortgage loan is a secured loan in which the collateral is property, like a home.
Mortgage loans are a very common type of debt, many people buy their houses with.
In a mortgage loan, the money’s used to buy the property.
The lender, however, is given security (in the form of a lien on the title to the house)
until the mortgage is paid off in full.
If the borrower defaults on the loan, the bank would have the legal right to
repossess the house and sell it, to recover the sum of money the lender owes to the bank.
In the same way as a mortgage is secured by housing,
a loan taken out to purchase a new or used car may be secured by the car itself.
The length of the loan period is considerably shorter
which usually corresponds to the car’s useful life.
Auto loans come in two types, direct and indirect.
In a direct auto loan the bank gives the loan directly to a buyer.
In an indirect auto loan a car dealership often acts as an middleman
between the financial institution and the buyer.