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Secured & Unsecured Loans
There are two forms of loans available to borrowers – secured loans and unsecured loans. A secured loan is one where the borrower is required to provide the lender with title to a specific asset that is secured against the loan. This asset is used as collateral in the event that the borrower fails to pay back, or defaults on his loan obligation. These assets normally take the form of high-ticket items like motor vehicles or financial assets such as stock and bonds. The lender has legal recourse to sell those secured assets in the event that the original debt of its associated interest payments are not repaid in full according to the letter of the agreement between borrower and lender.
Another type of secured loan is that provided by a bank to one of its clients who maintain financial assets in the form of savings at that institution. An amount of those savings is tied to the loan as collateral and may be utilized by the bank in the event of loan default. This type of secured loan offers very little risk to the lending institution as the assets are already in its control, and directly match the outstanding loan. The same cannot be said of the sale of an asset such as a motor vehicle or stock certificates whose value will fluctuate over time. The major secured loan that most people will hold over their lifetime is a home mortgage loan. Here, the lender will require a lien against the purchased property, which it will exercise in the event that the borrower is unable to meet their mortgage obligations.
Unsecured loans are normally exercised for smaller amounts of money. These include loans extended against credit card use, bank overdrafts, personal loans and lines of credit. No direct collateral is required to obtain these facilities and so the risk of repossession does not exist. While the lending authority can still take legal action against the borrower, this does normally not take place due to the fact that the cost involved would normally exceed the value of the assets recovered.
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