Loan services are one of the great conveniences of modern financial life, and secured loans are among the more interesting options available. A secured loan is made when the person incurring the debt puts up something of value to guard against the lender's potential risk in case the debtor defaults. Here's a look at some of the different options out there.
Mortgages
Home mortgage loans are one of the most widely used options on the market. When you obtain a mortgage, after the bank has done a credit check and some assessment of the value of the house, a document is signed that creates a lien against the property. This lien is then entered into the record at the county register, preventing you from transferring the property to anyone else. It also asserts the bank's interest in the property as a preferred creditor in case the borrower, for example, filed for bankruptcy protection.
In some jurisdictions, this may be handled a little differently. A deed of trust may be entered into the record rather than a lien. The lender is established as a beneficiary of the trust, and the trust is canceled whenever you've paid the mortgage in full.
Equity
The balance between what you owe on a loan and the value of the securing property creates what is called equity. This value can be used to secure an additional loan, a common practice when people take out home equity loans. Suppose you were 15 years into a 30-year mortgage. By this point, you might want to do some renovations on your house. By borrowing against the equity, you could get the money to do some remodeling.
Collateral
Auto loans work a bit differently. Generally, a bank pays the dealer the entire price of the vehicle upfront. The borrower is then given the use of the car as long as they make the agreed payments. Interest is charged to compensate the bank for its risk and to provide a profit motive. If the borrower fails to make installment payments, the bank can then take back the car that it has full title to. Upon completion of payments, the title is transferred to the borrower.
Title Loans
If you already own something outright, you can post your own property as a form of collateral. The same process applies to this scenario in the same way that auto loans work, and most title loans are issued against vehicles, too.
Unfortunately, personal finance is not a subject that is widely taught in schools. And yet, to be a functioning adult in society, you need to know the basics about earning money, saving money, taking out loans, paying interest, and so forth. Money makes the world go 'round, and you won't get very far in the world without a basic money education. There are many ways to learn more about money, from reading books to visiting a personal financial advisor. You can start by reading some of the articles on this blog, which address a wide range of financial topics for people in every situation.