A loan that is backed up by collateral to reduce the risk assumed by the creditor is referred to as secured loan. This loan may be secured by assets like houses, cars, stocks, bonds or other properties registered in the name of the loan borrower. For obvious reason, the valuation of the collateral must be relatively greater than the amount of loan taken out.
Before the loans are approved, the titles shall be delivered to and kept by the lender until full payment thereof. While the lender is in possession of the titles, the properties entail restrictions as to its use and disposal.
The common types of secured loan are nonrecourse and mortgage.
A nonrecourse loan is one in which the borrower is personally liable only to the extent of the value of the collateral. In such case, the lender can arrogate unto himself the property involved in case the borrower defaulted in payments. If the value of the collateral is not sufficient, the lender will no longer have recourse against the borrower.
The most common type of secured loan is mortgage, which can either be real or chattel. In real mortgage, the loan is secured by real properties such as lands and houses. On the other hand, chattel mortgage is secured by personal properties such as cars and stocks. In both cases, the lender agrees to return the title evidencing ownership of property mortgaged after the loan is fully satisfied.
Generally, when the borrower defaulted in paying his bad credit loan after it became due and demandable, the creditor can appropriate the collateral after following the legal procedure on foreclosure. In this way, the debts will be satisfied notwithstanding the failure of the borrower to make cash payments.
A borrower who obtains secured loans can enjoy the benefits of lower monthly repayments, higher amount of take out loan and repayments over a long period of time.
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