The secured creditor can come in many forms. A lot of lenders prefer to lend in this manner since it helps to better ensure repayment of loan amounts due the way a loan is established. Essentially any of these creditors require the borrower to somehow secure a loan.
How is a loan secured? Payback is typically guaranteed by giving the creditor rights to some property or assets should the loan not be repaid. Banks that own the titles on homes or cars for which they’ve given loans have the right to seize those homes or cars to the value that is still owed in order to collect on a loan. Sometimes a secured creditor owns part title to a business, to a person’s assets (like stock, loan or bond holdings) or other forms of property.
Not only is the right to some form of property of benefit to assuring repayment to the secured creditor, but it often guarantees some other rights. One of the major rights that many lenders get is the right to property first, before unsecured creditors get to make any claim. If a person defaults on a home loan and can’t make unsecured credit card payments, the bank with the home loan gets to seize assets before the credit card company can touch them. It could be said the secured creditor has security in two ways: from the owner’s default, and from minimizing amount that can be collected by other creditors of the owner. The rules get more complicated if more than one person has acted as a secured creditor for the borrower and may be differently defined depending on state or country.
While being a secured creditor could be viewed as solely self-serving, there are some benefits to working with a secured creditor from the standpoint of the borrower. The biggest of these is that lenders with security typically can relax lending rules to a certain degree. If a person doesn’t make car payments, the bank gets to take back the car. Of course, sometimes if a thing has declined in value, the secured creditor can still be the loser by this exchange. Still the greater likelihood in many scenarios is that secured creditors will at least recoup what is money is owed, and may make money in interest payments that didn’t count toward principal of the loan. This means a secured loan may be a little a cheaper or be offered at a lower interest rate.
Many types of loans are always secured. Home mortgages and vehicle purchases tend to be of this type. Sometimes personal loans also must be secured, particularly if credit is not impeccable. Loans to businesses might require some form of security too, but this may depend on credit history of the business, its profit level and growth, and its age.