secured loan
A loan backed by collateral that the lender can seize if the borrower defaults.
Example
“The secured loan using her car as collateral came with a lower interest rate than an unsecured personal loan.”
Memory Tip
SECURED — collateral protects the lender. Lower rates, higher risk to borrower.
Why It Matters
Secured loans matter because they typically offer lower interest rates than unsecured loans, making them more affordable for borrowers. Understanding this concept helps you make better decisions about when to use collateral to access credit at better terms.
Common Misconception
Many people wrongly believe that secured loans are always safer than unsecured loans for borrowers. In reality, the security protects the lender, not the borrower, since you risk losing your collateral if you cannot repay the debt.
In Practice
If you borrow 20,000 dollars to buy a car and use the car as collateral, the lender can repossess and sell the vehicle if you miss payments. This security allows the lender to offer you a 5 percent interest rate instead of the 12 percent rate you might receive for an unsecured personal loan.
Etymology
From Latin 'securus' meaning safe — the lender is secured by a physical asset.
Common Misspellings
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Related Terms
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See Also
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