Secured Loans

In the loan industry, there are two types of loans. There are unsecured loans like credit card debt and personal loans. The second type is secured loans. These are loans that are secured by physical assets called collateral. Two examples of secured loans are auto loans and mortgages.

Secured loans are backed by assets like cars or real estate. Because secured loans are backed by physical assets, financial institutions can foreclose on the asset if the debt is not paid. Since they maintain a security interest in the asset, they are in effect part owners of the asset. They are able to put conditions on usage of the asset such as maintaining insurance.

Financial institutions use secured loans in order to guarantee they will get as much of the loan back as possible in case of default. Because collateral in the loan exists, interest rates tend to be lower than in unsecured loans. The risk of default may be just as high as in a unsecured loan but since the loan provider has a security interest in the loan, they find that their risk level is significantly reduced.

Naturally, people who have secured loans will have a large amount of debt. This debt is not as flexible as unsecured debt, especially when those with debt problems attempt to restructure the debt. Because financial institutions do have a security interest in the loan, they know they can get their proceeds back. Debt problems with secured loans present special challenges that require special efforts when attempting to help people control their debt payments.

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