A secured loan is a type of loan where a tangible asset is pledged by the borrower to the creditor.  This pledged asset is commonly known as collateral.  Collateral ensures creditors interest to acquire their money back in case borrowers default on their payment.  The collateral being pledged also usually have the same value as the loan being given.  The higher the amount of the loan, the value of what the collateral should be more or less equal the loan granted.  This preparation is very common among creditors to protect their assets and to ensure payment will be given to them.

Although limited, the creditor pretty much have the right over a pledged property in a secured loan.  The confidence given to creditors by collaterals also bring forth the rules in setting loan limits and interest rates.

The benefit of a secured loan to the borrower is that it permits him/her to acquire a more accommodating and even a relaxed manner of payment.  In some cases, borrowers who are still obliged under a current secured loan are allowed to get another loan.  For the creditor, he would still get his money back in case the borrower fails to pay a certain amount of the loan.

In any secured loan venture, there is also a risk that comes with it.  Even though creditors are ensured of getting back the unpaid borrowed asset via the borrower’s collateral, it still does not guarantee them that they will get the same amount they have lent by selling the borrower’s pledged asset.  The gravity of the situation for borrowers is even more heavier if they are unable to sustain payment since they can lose a vital asset such as a home or property.

An example of a common secured loan is a mortgage loan.  The outcome could either be a winning situation or a losing situation.  A large amount of money is needed to buy or build a home and mortgage loans come into play.  The same asset which the loan is paying for will also be the one used as collateral.  In the event he defaults on his mortgage payment, foreclosure of his home is due to occur anytime soon.  To the lender’s side, it is quite a gamble for him/her to grant loans especially since there’s no sure way to tell if the borrower will be able to complete payment or if the property will be worth the value of the loan if it is foreclosed.  Whether the borrower will be able to sustain payments or if foreclosure is bound to occur, there’s no certainty if or when the foreclosed home will be sold at the same value.

In addition to securing a collateral, the borrower’s name should appear as the owner of the equity since creditors will not accept pledges from borrowers that do not bear their own name.  To make sure that the borrower is capable and reliable enough to be granted the loan, creditors make background checks or “credit check.”   A secured loan is put into motion in the form of a written contract once the credit check is completed and approved.  Stipulations and conditions are contained therein.

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