Secured Loan

Meaning and Definition

A secured loan is a type of loan that is backed by collateral, such as an asset or property, provided by the borrower. In the context of car finance, a secured loan typically refers to a loan where the vehicle being financed serves as collateral. If the borrower fails to make repayments as agreed, the lender has the right to seize and sell the vehicle to recover the outstanding debt.

Why it is important to know

Understanding secured loans is important for borrowers seeking car finance as it determines the risk and potential consequences of defaulting on payments. Secured loans generally offer lower interest rates compared to unsecured loans because the collateral reduces the lender's risk. Borrowers need to be aware that defaulting on secured car finance payments can result in repossession of the vehicle, negatively impacting their credit and potentially leading to financial and legal consequences.

Example in car finance

Suppose an individual wants to purchase a car and seeks a secured loan to finance the purchase. They approach a lender and provide the necessary information and documentation. The lender approves the loan application and agrees to provide the funds based on the condition that the vehicle being financed will serve as collateral. The borrower and lender enter into a car finance agreement, and the borrower makes regular repayments as agreed. If the borrower fails to make repayments, the lender has the right to repossess and sell the vehicle to recover the outstanding debt.