subject: Secured Debt - What Makes It Secured [print this page] Secured debt is debt backed by collateral to reduce the risk associated with lending. The outstanding balance is covered by some item of value. The creditor acquires the right to take control of the collateral in case of debtor default. The lender is able to guarantee a return on the amount of the loan or the line of credit that was extended to the recipient. If the debtor does not repay the debt, the creditor is legally permitted to take possession of the collateral and resell it to recover losses.
A mortgage, a home equity loan or a car loan are all examples of secured debt. Debt backed or secured by collateral. In a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.
Bank loans are good examples of secured debt. Banks can extend loans to you to buy a car or property. You in turn pledge some form of collateral. This could be any item of value approved by the financial institution for lending purposes. You will be required to sign an agreement handing over the item to the bank if you fail to make payments when due. This is the process of securing a debt.
Benefits
Secured loans often have slightly lower rates of interest than non-secured loans. The debtor pays back less money in finance charges and interest rates.
People with secured loans are more motivated to pay back on time. When the debtor misses a certain number of payments the lender can declare the loan to be in default subsequently resulting in the liquidation of the collateral. This motivates debtors to make regular payments so as not to lose their assets.
Bankruptcy does not wipe off secured debts. The creditor is considered a secured creditor in case of bankruptcy. The collateral will be sold and the proceeds given to the creditor to satisfy the debt.
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by: Titus Hardin
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