Secured lending
What is it?
A loan in which the borrower offers an asset as collateral to support the loan. In case of default, the lender has the right to seize the collateral and recover the value of the asset to cover the loan. The assets used as collateral may include real estate, vehicles, investments, or other valuable goods.
This type of loan is considered less risky for the lender, as they have an additional safeguard in case the borrower fails to meet repayment obligations. In exchange, the borrower may obtain more favorable terms, such as lower interest rates, due to the reduced perceived risk by the lender.
Key aspects to consider
When opting for secured lending, both the borrower and the lender should carefully assess the value of the proposed collateral. It is important to ensure that the asset used as security has sufficient value to cover the debt in the event of default.
Moreover, the risk for the borrower is significant, as failure to meet loan payments may result in the loss of the pledged asset. This should be considered carefully, especially when the asset is of personal or high financial value.
It is also essential to review the loan conditions, such as the loan-to-value ratio (LTV), and ensure that the terms are fair and equitable.