Further
Loan Definitions and Information:
Unsecured
Loans
An unsecured loan is a loan that is not backed by collateral.
Also known as a signature loan or personal loan.
Unsecured loans are based solely upon the borrower's credit
rating. As a result, they are often more difficult to get than
a secured loan, which also factors in the borrower's income.
Secured
Loan
A secured loan is a loan in which the borrower pledges some asset
(e.g. a car or property) as collateral for the loan, which then
becomes a secured debt owed to the creditor who gives the loan.
The debt is thus secured against the collateral — in the
event that the borrower defaults, the creditor takes possession
of the asset used as collateral and may sell it to satisfy the
debt by regaining the amount originally lent to the borrower.
From the creditor's perspective this is a category of debt in
which a lender has been granted a portion of the bundle of rights
to specified property. The opposite of secured debt/loan is unsecured
debt, which is not connected to any specific piece of property
and instead the creditor may satisfy the debt against the borrower
rather than just the borrower's collateral.
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Purpose
There are two purposes for a loan secured by debt. In the first
purpose, by extending the loan through securing the debt, the
creditor is relieved of most of the financial risks involved because
it allows the creditor to take the property in the event that
the debt is not properly repaid. In exchange, this permits the
second purpose where the debtors may receive loans on more favorable
terms than that available for unsecured debt, or to be extended
credit under circumstances when credit under terms of unsecured
debt would not be extended at all. The creditor may offer a loan
with attractive interest rates and repayment periods for the secured
debt.
Types
One popular type of secured loan that is normally only available
at a bank or credit union is the savings secured loan. In this
type of loan, the borrower must have a savings account with the
creditor. A portion of the money in this account is used as collateral
to secure a loan equal to the amount pledged. This money is then
frozen in the account but continues to earn interest. As the loan
is repaid the secured portion of the savings account is freed.
This has advantages for both the creditor and the borrower. If
the borrower defaults on the loan the collateral is already in
the creditor's possession so it is a very low risk. As a result,
the creditor usually offers a much lower interest rate. The disadvantage
of this type of loan is that it is limited by the available fund
in the savings account.
Other Useful Definitions
A mortgage
loan is a secured loan in which the collateral is
property, such as a home.
A non-recourse loan is a secured loan where the
collateral is the only security or claim the creditor has against
the borrower, and the creditor has no further recourse against
the borrower for any deficiency remaining after foreclosure against
the property.
A foreclosure is a legal process in which mortgaged
property is sold to pay the debt of the defaulting borrower.
A repossession is a process in which property,
such as a car, is taken back by the creditor when the borrower
does not make payments due on the property. Depending on the jurisdiction,
it may or may not require a court order.
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Source
of Information: Wikipedia
Honest Johnny does not supply financial advice. All information
contained herein this website should not be construed or taken
as advice. Please consult your IFA for advice.
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