A secured loan is a type of loan in which the borrower pledges an asset as collateral for the loan. This asset, such as a car or property, serves as security for the creditor who provides the loan. By offering collateral, the borrower provides a form of guarantee to the lender that they will repay the loan. If the borrower defaults on the loan, meaning they fail to make the required payments, the creditor has the right to take possession of the asset used as collateral and may sell it to recover the amount owed.
The concept of secured loans is based on the idea that providing collateral reduces the risk for the lender. In case of default, the lender can recoup some or all of the original loan amount by selling the asset. This added security often leads to lower interest rates for secured loans compared to unsecured loans, where no collateral is involved. However, the borrower's credit history, ability to repay, and other factors also influence the interest rates offered.
Secured loans can be used for various purposes, including purchasing a home or a car, financing business ventures, or obtaining funds for personal needs.