Secured loan or secured debt definition

Debt Term

A secured loan (also called secured debt) has terms in which the borrower pledges to provide the lender ownership of a specific asset (collateral) if the borrower can’t repay the loan according to the terms. This extra “security” for the lender typically lowers the interest rate provided to the borrower as well as improve other loan terms.

Mortgages (for buildings or land) and automobile loans are the most common types of secured loans. Business equipment loans are also common types of secured loans.

What happens if the asset can’t be sold by the lender for at least the balance of the loan? That depends on the “fine print.” If the secured loan is also a nonrecourse loan, then the lender cannot pursue the borrower to recover the balance. In other cases the lender can sue in court and pursue a deficiency judgment for the balance.

While many secured loans are created between two consenting partners, in some cases a lien may be created which is a type of secured debt when one party hasn’t been paid by another party. For example, in the US a mechanic’s lien is created by contractors for improvements they have made to land or buildings. Governments can create tax liens when they believe taxes are owed. See the Wikipedia entry for lien to learn about lots of details.

Don Gooding

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