A secured loan is one in which the money borrowed is guaranteed to be repaid or some asset will be forfeited. The most common example is a home loan. The borrower agrees to repay on the terms of the contract, and if he or she defaults, the lender can legally claim the home as compensation.



In theory, that means that if you miss a payment on the home loan, the lender has the legal right to foreclose and sell the property. In practice, that never happens. Among other reasons, lenders know that reclaiming a house is a long, unpleasant chore and they would be left with the necessity to sell the home to recoup the money.

No lender is going to do that for such a small misstep as missing a single payment. Even if the borrower lags by several months, at most the lender will typically send a series of firm letters demanding payment before taking any other action. Even in an active seller's market lenders have many more important things to do and don't want to undertake the effort of removing a homeowner and selling a house.

While this may be the case it would not be smart to ignore the fact that the lenders have this right. The reality of the lender's rights in connection with a secured loan can even be seen with unsecured loans. Even when a borrower has not pledged property as security for a loan, if a borrower defaults on a loan the lender, through simple legal proceedings, can confiscate property, or seize other assets.

But, legal procedures are only RELATIVELY simple and inexpensive - and lenders will almost always try to work out a repayment option before taking that step.

Typically the interest rate on an unsecured loan is higher than secured loans. This is because the lender is taking a greater risk since the money is not secured by assets or property.

Since the lender will incur more loss on unsecured loans defaulted on, they make up for this potential loss by charging a higher rate of interest. Sometimes that higher interest rate will encourage borrowers to select a secured loan. Lenders prefer that because the borrower has more incentive to repay the loan when it is attached to their property.