Types of Secured Loans
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In financial terms a loan is a borrowing of monies by one or several persons, institutions, corporations or other entities and then to repay that borrowed amount or to interest on that borrowed amount. The borrower is usually legally liable to repay interest on that loan until it is paid off and to also repay the original principal amount borrowed. Unlike other forms of borrowing that a person can make use of for a short period of time (such as credit card borrowing), loans are meant to be used for longer periods of time. Loans are categorized into secured and unsecured types so as to suit the purpose.
Most loans are unsecured in nature but there are some exceptions where a borrower may need to pledge security in order to receive a loan. Some examples of this type of security are a car, home or a commercial building. For secured loans, the borrower pledges the value of the property against the loan so that if he were not able to repay the loan, the creditor would be able to sell the pledged property and recoup his investment. This allows the creditor to get back his money without having to put up the loss. However, the interest rate applicable will generally be a lot higher than the interest charged for an unsecured loan.
A promissory note is a legal document drawn up by both the creditor and the borrower wherein all details regarding the repayment of the loan is outlined. Usually, the borrower pays a certain monthly installment which becomes due after a certain amount of time. At the end of that period, if no payment has been made, the lender is allowed to repossess the item on which the payment was made. The promissory note is usually referred to as the “promise to repay.”
Similar to the promissory note is the contract for deed, which is a legal contract entered into by the lender and the borrower wherein the latter agrees to pay back the loan in full. The contract for deed stipulates that the lender must pay the loan in full and on the agreed upon date. Like the promissory note, if no payment is made, the lender must repossess the collateral item on which the loan was made. In some instances, this may also apply if the borrower fails to pay for three months.
Similar to the minimum payment is the balloon payment, which is a fixed amount of money owed to the lender by the borrower which is due when the loan is due for repayment. If the minimum payment has not been paid by the due date, the lender must either renew the loan or sell the collateral. The lender must however make sure that the new amount will be received by the borrower.
In short, the terms “secured” or “collateralized” loans refer to loans that require collateral. These loans come with a variety of interest rates, terms, and conditions. While these loans are often used by borrowers to provide their children with better educations or their first homes, they can also be used for any purpose. They are great options for people who do not want to put up their home as collateral but need a steady source of funds until they get those funds. While this type of loan may not be the best choice for all situations, it can prove to be very beneficial to the borrower.
