A secured loan is a lending agreement in which the borrower pledges an asset as collateral, which the lender can seize if the borrower cannot pay back the underlying loan.
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.
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.