What is a loan? A loan is a contract between a borrower (individual or business) and a lender (Financial Institution), by which the borrower promises to repay a specified amount of money in a specified amount of time to the lender.
This usually comes at a cost, known as interest on the loan. In the end the borrower will repay an amount which is higher then the original capital which was borrowed from the lender.
A distinction is made between two types of loans, secured loans and unsecured loans. Secured loans usually carry a lower interest rate than unsecured loans.
What is a Secure Loan?
A secured loan is a type of loan by which the lender has a lien on the title of a specified asset. If the loan does not get repaid, the lender has the right to take ownership of the specified asset. Secured loans can be first charge or second charge.
With first charge secured loans, the lender has the first entitlement to the secured asset, before any other lender who has issued a secured loan on the same asset. Once the first charge lenders debts have been repaid, any value of the asset that is left will be paid over to any second charge lenders.
Types of Secured Loan
The most common type of a secured loan is the home owner loan or mortgage. A mortgage is a contract between the borrower (home owner) and the lender (bank), by which the borrower promises to repay the lender the loan received to enable him to purchase his home, including the agreed interest due on the loaned amount.
If for any reason the borrower fails to repay his loan the lender has the right to repossess the borrowers' property and sell the property to enable them to recover the debt outstanding.
To ensure that the full debt will be repaid, financial institutions, such as banks, will usually only lend monies up to 80%-90% of the property value.
Due to the increasing housing market in recent months, banks often offer customers 100% mortgages at a higher interest rate, as they are confident that they will be able to recover the debt due to an increase in house price.
Car loans are another type of secured loans. With such a loan, the car will be the security and repossessed if repayments are not made.
Often secured loans are taken out by businesses to expand, upgrade machinery or to improve business cash flow. Secured loans can be taken out against the proprietors' residential property as well as the commercial properties and assets in the business.