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Asecured loan is aloan in which the borrowerpledges some asset (e.g. a car or property) ascollateral for the loan, which then becomes asecured debt owed to the creditor who gives the loan.[1] The debt is thus secured against the collateral, and if the borrowerdefaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is theforeclosure of a home. From the creditor's perspective, that is a category ofdebt in which a lender has been granted a portion of thebundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain adeficiency judgment against the borrower for the remaining amount.
The opposite of secured debt/loan isunsecured debt, which is not connected to any specific piece of property. Instead, the creditor may satisfy the debt only against the borrower, rather than the borrower's collateral and the borrower. Generally speaking, secured debt may attract lower interest rates than unsecured debt because of the added security for the lender; however, credit risk (e.g.credit history, and ability to repay) and expected returns for the lender are also factors affecting rates.[2] The termsecured loan is used in the United Kingdom, but the United States more commonly usessecured debt.
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 thefinancial risks involved because it allows thecreditor to take ownership of the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where thedebtors may receiveloans on more favorable terms than that available forunsecured debt, or to be extendedcredit under circumstances whencredit under terms ofunsecured debt would not be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.[citation needed]
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Before the global economic crisis of 2006, theFinancial Services Authority (FSA) estimated that the UK secured loan market had a net worth of £7,000,000,000. However, following the close ofLehman Brothers' sub-prime lender BNC Mortgage in August 2007, the UK's most prominent secured loan providers were forced to withdraw from the market.
The United States is the global leader insecurity interest law with respect to personal property; in the 1940s, it was the first country to develop and enact the notion of a "unified" security interest. That concept has since spread to many countries around the world after it became evident that it is one of the reasons for why the United States has the strongest economy in the world.[dubious –discuss][citation needed] For example, to raise money, American ranchers could pledge personal property like cattle in certain ways that historically were impossible or very difficult in Uruguay or most other developing countries.[7][better source needed]
In the case ofreal estate, the most common form ofsecured debt is thelien. Liens may either be voluntarily created, as with amortgage, or involuntarily created, such as amechanics lien. A mortgage may only be created with the express consent of thetitle owner, without regard to other facts of the situation. In contrast, the primary condition required to create amechanics lien is thatreal estate is somehow improved through thework or materials provided by the person filing a mechanics lien. Although the rules are complex, consent of thetitle owner to the mechanics lien itself is not required.
In the case ofpersonal property, the most common procedure for securing thedebt is regulated under Article 9 of theUniform Commercial Code (UCC). This uniform act provides a relatively uniform interstate system of forms and public filing of documents by which thecreditor establishes the priority of their security interest in theproperty of the debtor.
In the event that the underlyingdebt is not properly paid, thecreditor may decide toforeclose the interest in order to take theproperty. Generally, the law that allows thesecured debt to be made also provides a procedure whereby the property will be sold atpublic auction, or through some other means of sale. The law commonly also provides aright of redemption, whereby a debtor may arrange for late payment of thedebt but keep the property.
Debt can become secured by acontractual agreement,statutory lien, orjudgment lien. Contractual agreements can be secured by either apurchase money security interest (PMSI) loan, where the creditor takes a security interest in the items purchased (i.e. vehicle, furniture, electronics); or, anon-purchase money security interest (NPMSI) loan, where the creditor takes a security interest in items that the debtor already owns.
