Secured Loan Basics

Secured lending is a means of securing a loan. It is especially important concerning high risk borrowers, and is almost necessary in all situations.

Security for a loan can be provided by pledging the borrower's assets to the bank or financial institution, and/or by signing a personal guaranty.

Any asset that is offered to secure a loan is called collateral, and needs to be evaluated by the lender on the following: liquidity and marketability. The liquidity of an asset simply looks at how easy or difficult it can be to convert it to cash. The marketability of an asset is just a means of determining if there is a market for the asset; if people will buy it at a decent price.

What sort of people borrow on a secured loan basis? Almost everyone does, in fact. Individuals seeking a personal loan from a secondary lender sign over the titles to their vehicles as collateral for security. A company or business that is looking for a larger loan will put up their plant and other tangible assets that can be sold off incase of default. It's not likely you will get a loan for any amount of money without any means to secure it.

Almost any lending situation you can think of calls for security. Farmers that need more acreage, new businesses that need inventory to jump start their sales, even municipal entities borrow and can put up their tax revenue as a security. In almost all lending situations there is a means to secure a loan.

Security is largely a legal aspect. There are documents which need to be signed, and reviewed by lawyers; documents such as promissory notes, notes of guaranty, and most importantly the Uniform Commercial Code (UCC) financing statements. Hardly any lender will physically take the collateral and keep it as a 'just in case' method, less than 10% of all securities are dealt with this way. The most efficient way is to sign a UCC statement which is a legal document that can be taken to (and recognized by) the court in the event a lender needs to take control of pledged collateral. This is the most common form of securing assets as collateral for a loan, and make up about 80% of all secured loans.

When a court date is set because a borrower defaults on a loan, there is no hope for reconciliation and the lender has a need to regain the outstanding debt left on the loan. This can only be done by taking control of, and liquidating collateral; and this is only accomplished through a legal process with the courts.