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Secured Debt: Beneficial to Lender and Borrower

March 18th, 2009

secured-debt.jpgWe seem to be on a roll with the money and finance articles this week. Today’s topic involves the concept of secured debt vs. unsecured debt, the primary difference being that in the first situation the loan is “secured” by the borrower putting forward some type of property as collateral. This particular piece argues that this can actually be beneficial for both borrowers and lenders.


A secured debt is a loan given to a person against the security of a certain asset. This asset can be a movable asset such as cars, bikes, trucks, etc. or immovable assets such as land or buildings. If the person who has taken a loan defaults on its repayment, the creditor has the right to take over the property. The general opinion in the market is that a secured debt is beneficial only to the creditor because if the borrower defaults on payment they can always sell the asset and recover the money. On the face of it, this might seem to be true but this is not entirely the case because there are certain benefits to the debtor as well. Let us first understand why an unsecured debt is beneficial to the creditor:

  1. Security of Amount Lent: The most important benefit to the creditor is that the amount lent is secured. If there is a default by the borrower, the creditor can sell the asset and recover the amount of the loan.
  2. High Ticket Loans: The creditor is able to disburse a higher loan amount per person. This is because the assets which are given to the lender as a security are usually of higher value. Since these values are relatively high, the lender can offer a higher loan amount per person.
  3. More Loan Disbursals: Because these loans are secured, the lenders are able to provide them to people even if they have a low credit score. The creditor benefits because there is a considerable increase in the turnover of loans given.
  4. Fewer Problems with Litigation: Since the loan is secured, the borrowers are less likely to default. This will help in preventing litigation which arises due to default in repayment of loan.

There are various benefits that occur to the borrower when he or she takes a secured loan. Some of the benefits to borrower(s) are:

  1. Lower Interest Rate: The rate of interest that you pay on a secured loan is much lower than the interest rate on an unsecured loan. This is because the rate of interest charged by the banks is directly related to the risk that they take in giving the loan. In a secured loan the risk to the lender is minimized because the loan that he or she has given is secured against an asset. Therefore the rates of interest charged for secured loans are generally lower.
  2. Flexibility in Repayment: Because a secured loan is given based on the value of the asset be it movable or immovable, the lenders are more flexible with the repayment terms. Today if you take a car loan, some lenders offer a repayment period of up to 7 or 8 years while you can get up to 20 years in a real estate loan. This makes the life of the borrower easier because the amount that has to be paid every month is smaller and can be more easily repaid over a period of several years.
  3. Loan Availability even on Low Credit Score: The loans are made available to people who have a low credit score. This is because the creditor is secured against the asset and does not need to worry as much about the repayment capacity of each person. It goes without saying that the interest rate charged to people with a high credit scores is much lower than the interest rates charged for people with a low credit scores.

An unsecured debt is beneficial to both the creditors and the debtors. How we can use it to our advantage depends entirely on us.



2 Responses to “Secured Debt: Beneficial to Lender and Borrower”

  1. comment number 1 by: wallace

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  2. comment number 2 by: unsecuredbusinessloans

    Great Blog! Unsecured Business loans fast and quick for small-large businesses with good credit or bad credit and merchant cash advances.Thanks for the great reading. I will pass this on to our Ira clients to read.

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