FinanceDogma – Finance, loans, creditcard and mortgages

September 6, 2012

Secured Loans

Filed under: Finance — Tags: — admin @ 4:53 pm

The concept of a secured loan is a method whereby someone borrows money with a backup asset and should they default on their commitment, they will be able to then pay back in kind – for instance, this might be a car or property in this regard. Thus the asset can act as a collateral device for repayment security. The concept of secured debt is in semantic opposition to that of unsecured debt whereby there is not an actual asset to act as collateral against.

In the circumstances that the borrower would default with their payment contract, then the creditor would be able to take over ownership of that which was secured against. Furthermore, they might then sell the asset in order to gain remuneration to realise the cash basis of it. For instance, in the case of a house that was used in the sense of a secure loan, that house could be claimed, sold on and then the cash used to repay the debt. In the instance of course that the asset would be sold for more than the actual required amount, this could potentially provide a surplus.

In regards to the actual intention for taking out the secured loan, the purposes of it could first of all include trying to create more cash flow and credit in order to relieve existing payment requirements. Furthermore, this type of loan might be regarded as a more secure type than of course an unsecured loan. However, one aspect of this situation that would need to be taken into account is that the asset that is at stake might naturally increase or decrease in value. In the sense of a house that is used for mortgage purposes; this situation would be known as ‘negative equity’.

By having something that is secured the rates might perhaps be better than those in the situation of an unsecured loan – whereby in that instance there would not necessarily be a provision for the provider in the event that the borrower was unable to maintain their commitment – hence in that situation the lender might end up without any prospect of regaining their funds in the event of bankruptcy. Thus typically secured loans will be the clear preference normally for those who are seeking to lend out credit for those seeking loans.

Whilst having already mentioned about mortgages, terminology which is involved in that situation could include ‘nonrecourse’ whereby the house would be the only asset that could be used as collateral and the lender would have no further recourse after trying to sell it. A foreclosure is whereby property that has been mortgaged is sold in order to service the defaulted debt. Furthermore a ‘repossession’ is a situation whereby property for instance a car is taken by the creditor in order to claim back the money that was owed in the form of a secured asset again non-payment of that loan. This might be able to be done under a court order for instance.

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