Secured Loan
Definition and meaning of Secured Loan in real estate.
A secured loan is a borrowing arrangement where the borrower pledges a specific asset, such as a house or a car, as collateral to guarantee repayment of the debt. If the borrower defaults on the payments, the lender has the legal right to seize the asset to recover the outstanding balance.
In more detail
Because the lender has a physical asset to claim in case of default, secured loans carry less risk than unsecured loans like credit cards or personal lines of credit. This reduced risk typically translates to lower interest rates and higher borrowing limits for the consumer.
Mortgages are the most common type of secured loan in real estate, where the property itself acts as the collateral. Lenders require property appraisals and title searches to verify the asset's value and ensure no other liens exist before approving the loan. Borrowers must manage their payments carefully, as falling behind can result in losing their home through foreclosure.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Common collateral | Real estate, vehicles, savings accounts, investments |
| Primary benefit | Lower interest rates and larger loan amounts than unsecured loans |
| Watch out for | Loss of the pledged asset if you fail to repay |
A buyer takes out a secured loan in the form of a $250,000 mortgage to purchase a townhouse, pledging the townhouse itself as the collateral that the lender can claim if payments stop.
Frequently asked questions
What makes a loan a secured loan?
A loan is secured when it is backed by collateral, meaning the borrower pledges an asset that the lender can legally seize if the loan is not paid back.
Is a home equity line of credit a secured loan?
Yes, a home equity line of credit is secured by the borrower's home, making it a second mortgage that carries the risk of foreclosure if payments are missed.