What is a Secured Note?

A secured note is one of the most common of all lending agreements. With this type of contract, the loan is backed or secured with some type of collateral. In the event that the debtor defaults on the loan, the lender has the right to seize control of that collateral as a means of offsetting any losses resulting from the failure of the debtor to settle the outstanding debt. The nature of the collateral will vary, depending on the type of loan arrangement involved, with real estate, stocks and bonds, and sometimes even assets such as artwork or jewelry considered acceptable.

Mortgages are typically structured as secured notes. In this scenario, most lenders will utilize the property acquired with the loan as the collateral for the note. During the period of time that the debtor is making monthly payments on the mortgage, the lender retains an interest in that property. Once the note is paid in full, the lender relinquishes all claims on the real estate, and the debtor owns the property without any type of lien or other claim against that property. As long as the payments are remitted according to the terms of the secured note, the lender will not attempt to seize the property. Should the payments not be made on time, the lender may choose to exercise his or her right to declare the mortgage in default and take the legal steps necessary to foreclose on the property held as collateral.

Other types of loans may also be structured as a secured note. Car loans often require that the vehicle that is purchased with the proceeds of the loan is named as collateral for the duration of that loan. Even in private lending situations in which a friend or family member extends a loan to a loved one, the terms and conditions of the transaction may require that the recipient secure the loan with a pledge of some type of property. As long as the property offered as collateral is deemed by the lender to be equal to the amount of the loan, and also likely to hold that value until the loan is paid in full, just about any type of property may be used as collateral on a personal secured note.

Like most loan agreements, a secured note also identifies the terms related to the application of interest during the life of the loan. Often, the rate of interest is fixed, meaning that the same interest rate is applied to the outstanding balance of the loan from the beginning date to the date that the loan is settled in full. Other notes will carry what is known as a variable or floating rate of interest, allowing the lender to adjust the interest rate in response to prevailing average interest rates within the wider economy. There are also examples of secured note loans that begin with a fixed or variable rate of interest, but offer the debtor the chance to switch the interest type at specific points during the life of the loan.