A secured loan is one that is used for any purpose and is backed up by property, pledged by the borrower, such as a house, auto, motorcycle, expensive jewelry or other valuable items. I business may put up valuable inventory. The asset is known as collateral and its purpose is to ensure repayment of the secured loan. Collateral is a type of insurance for the lender. If a borrower does not wish to lose the item or property put up as collateral, more than likely they will have the motivation to keep to the conditions of the contract and repay the borrowed money in a timely fashion. In the worst case scenario, a finance company can repossess the item financed if a borrower fails to pay (defaults) the money owed in the loan contract. In the absence of property, a borrower may put on a security deposit.

There are two purposes for a secured debt loan. The first purpose is, by extending the loan through securing debt; the creditor is relieved of the financial risks involved because the debt is repaid by liquidating the borrower’s pledged asset, in order to satisfy the loan agreement. This permits the second purpose of a secured debt loan, in which the borrower receives the loan on more favorable terms, such as a lower interest rate, because the risk is smaller for the lender. Without collateral, the loan is considered unsecured and the interest rate and fees are much higher, due to a greater risk to the lender. Large loan amounts are not extended to individuals or businesses if the debt is unsecured. Only small loans can be processed without collateral or a good credit score.

There are different varieties of secured loans. One popular type that is usually only available from a bank or financial institution is the savings secured loan. In this type of loan, the borrower must have a savings account set up by the lender. A portion of the money in the account is used as collateral to secure a loan that is of equal value to the balance granted. The agreed upon amount is then frozen from use but continues to earn interest. As often as the loan is repaid the frozen portion of the savings account is freed for use. This has advantages for both the creditor and the borrower, because if the borrower defaults on the loan the collateral is already in the lender’s possession so it is not considered high risk. Other secured loans are: a mortgage loan in which the collateral is the property for which the loan is obtained.

A nonrecourse loan is a secured loan in which the collateral is the only security or guarantee the lender or creditor has against the borrower, and has no further options against the borrower for any payments in default or remaining balance after foreclosure of the property. (A foreclosure is a legal process in which the collateral property is sold to satisfy the debt of the borrower).