QandAs: Loans

What Is A Secured Loan?

Answer:
A secured loan is simply one of the many ways

to borrow money. Typically, a loan is guaranteed, or secured, by something of value (such as a home, car, or financial instrument). This is typically the easiest way to borrow larger amounts of money.

The money that is loaned to you is secured by placing a lien on the property. This simply gives the bank or loan company an ownership stake in the property while you owe them the money. This lien will be filed by the company with the local county or state government, and it will secure their right to the asset should you decide to not pay off the loan.

Should you decide the sell the property during the time that you owe the money, the lien holder will receive their money first, before you receive anything from the sale. In the case where you need to sell the item, such as your home, and it has lost value to the point where it is worth less than what you owe, you will be unable to sell the item without the approval of the lender. If this is the case, you will have several options: short sale without recourse, short sale with recourse, or sign a personal note with a higher interest rate.

Short sale without recourse simply means that the bank has agreed to accept less than owed on the loan, and they will not come after you for the difference. In this case, keep in mind that forgiven debt is considered taxable income by the IRS. Short sale with recourse means that they will accept all the proceeds from the sale, but they reserve the right to come after you at a later time for the difference. And, signing a personal note means that you will sign another loan to cover the difference and pay it off over time.

If you fail to pay off the loan as agreed, the bank or lending institution has full rights to repossess the item, even if it is worth more than you owe on it. If it brings more at sale than what you owe plus repossession charges, you will receive a check for the difference, although this is rare. Repossession should be avoided at all costs.

Loan rates on secured loans are typically much lower than they are on non-secured personal loans.

In the case of a mortgage, many times there in more than one loan on the property. In this case, the first mortgage will always take first priority over any other liens. They will get all of their money before the second mortgage gets anything. This is why second mortgages usually have a higher interest rate. For example, if a person has a $100,000 first mortgage and a $30,000 second mortgage, but the property only sells for $120,000, the first mortgage will get all their money, but the second mortgage will only receive $20,000. In this example, you would need to work out a solution with the second lien holder.