A secured loan is a financial arrangement in which the borrower uses an asset of specific value as a guarantee for the loan amount. This asset, known as collateral, can include items such as a house, car, or other valuable property. By securing the loan with collateral, the lender has a layer of protection, as they can recoup the value of the loan through the asset in the event of default. Secured loans generally offer lower interest rates compared to unsecured loans since the risk to the lender is reduced. Examples of secured loans include mortgages, where the home serves as collateral, and car loans, where the vehicle itself is the pledged asset.
For instance, if an individual applies for a mortgage, the house they intend to purchase is the collateral. Should the borrower fail to repay the loan as agreed, the lender has the legal right to foreclose on the property. This arrangement benefits both parties, as the borrower typically receives a larger loan amount with favorable terms, while the lender gains assurance against default. However, it's crucial for borrowers to fulfill their repayment obligations, as failing to do so could result in the loss of the collateral.