Secured Loan

Definition

The term secured loan is used to describe a loan that is backed by property in the possession of the borrower.  A secured loan reduces the risk to the lender because they have the ability to repossess or foreclose on the property if the borrower goes into default on the loan.  The property used to secure a loan is called collateral.

Explanation

Also known as secured debt, the most common example of a secured loan is a mortgage.  By definition, a mortgage is a legal agreement that involves a loan secured by the home itself.  If payments were to stop on a mortgage, the lender has a legal right to foreclose on the home, and sell it to recover the remaining principal on the loan.

In the same way, a car loan is secured by the vehicle itself.  If payments stop on the loan, the lender has the right to seize, or repossess, the car.  The lender can then sell the vehicle to help repay the outstanding balance on the loan.

Loans secured with collateral offer the lender some protection against default.  The lower risk of default allows the lender to offer more attractive interest rates to borrowers when compared to unsecured loans such as credit card debt.

Related Terms

mortgage, collateral, unsecured loan, foreclosure