What Are Secure Loans?
A secure loan is a financial obligation that attaches to, and is secured by, a specifically identified piece of property. The property can be real, personal, or even intangible as long as it has value. Secured loans reduce the lender's risk because the lender has a lien on the valuable collateral property.
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Promissory Note
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The first part of a secure loan is a promissory note or other similar contract requiring the borrower to repay the lender. The promissory note typically identifies the terms of the loan agreement, including the amount borrowed, the repayment schedule, the interest rate, and any penalties or fees that may accrue.
Security Agreement
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A secured loan also requires the use of some type of security agreement. The security agreement is a document that gives the lender a lien, or legal interest, in a specifically identified piece of the borrower's property. The lien gives the lender the right to repossess that property, if the borrower defaults in making payments.
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Collateral
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The security agreement will identify a specific piece of property, called the collateral, that is subject to the lien. The collateral can be any type of property acceptable to the lender. Common types of collateral include homes or real estate used to secure mortgage loans, or automobiles used to secure auto loans. Bank accounts or other investment accounts, including retirement accounts, can also be used as collateral on certain types of secure loans. Even intangible property, such as copyrights or trademarks, can act as collateral.
Purpose
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Secured loans reduce the lender's risk in making the loan, which translates into reduced interest requirements for the borrower. Rather than simply relying on the borrowers promise to repay the money, the lender has a legal right to take the borrower's property if the borrower defaults. This reduced risk allows borrowers with low credit qualifications to obtain loans, and also allows all borrowers to obtain loans at lower interest rates. Secured mortgage and auto loans, for example, generally carry a much lower interest rate than unsecured personal loans.
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References
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