A secured loan is a

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

in which the borrower pledges some asset (e.g. a car or property) as

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mortg ...

of a home. From the creditor's perspective, that is a category of

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

in which a lender has been granted a portion of the

bundle of rights The bundle of rights is a metaphor to explain the complexities of property ownership. Law school professors of introductory property law courses frequently use this conceptualization to describe "full" property ownership as a partition of var ...

to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a

deficiency judgment A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends o ...

against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property. Instead, the creditor may satisfy the debt only against the borrower, rather than the borrower's collateral and the borrower. Generally speaking, secured debt may attract lower interest rates than unsecured debt because of the added security for the lender; however, credit risk (e.g.

credit history :''This article deals with the general concept of the term credit history. For detailed information about the same topic in the United States, see Credit score in the United States.'' A credit history is a record of a borrower's responsible repay ...

, and ability to repay) and expected returns for the lender are also factors affecting rates. The term ''secured loan'' is used in the United Kingdom, but the United States more commonly uses ''secured debt''.

Purpose

There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

to take ownership of the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the

debtor A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

s may receive

s on more favorable terms than that available for unsecured debt, or to be extended

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

under circumstances when

under terms of unsecured debt would not be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.

Types

mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...

is a secured loan in which the collateral is property, such as a home. *A

nonrecourse loan Nonrecourse debt or a nonrecourse loan (sometimes hyphenated as non-recourse) is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defau ...

is a secured loan where the collateral is the only security or claim the creditor has against the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after foreclosure against the property. *A

is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower. *A repossession is a process in which property, such as a car, is taken back by the creditor when the borrower does not make payments due on the property. Depending on the jurisdiction, it may or may not require a court order.

UK secured loan market

Before the global economic crisis of 2006, the

Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...

(FSA) estimated that the UK secured loan market had a net worth of £7,000,000,000. However, following the close of

Lehman Brothers Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, a ...

' sub-prime lender BNC Mortgage in August 2007, the UK's most prominent secured loan providers were forced to withdraw from the market.

UK secured loan market timeline (following the global credit crisis)

* August 2007: Lehman Brothers closes its sub-prime lender, BNC Mortgage. * September 2007: Southern Pacific Personal Loans and London Mortgage Company close down. Kensington Mortgages withdraws from the secured loan market a day later. * October 2007: White Label Loans launches to fill the gap left by Southern Pacific Personal Loans, Kensington Personal Loans and Money Partners. Product launch is piloted by Beech Finance Ltd. and Specialist Financial Services Ltd. * April 2008: London Scottish Bank closes down entire lending division. * May 2008: Future Mortgages announce they will close for business. * June 2008: Picture Financial ceases to trade in the sector. * July 2008: Barclays ceases to sell secured loans through FirstPlus. * September 2008: Lehman Brothers declares bankruptcy. * November 2008: Bank of America subsidiary Loans.co.uk ceases to trade. * December 2008: West Bromwich Building Society subsidiary White Label Loans closes its doors to new business just fourteen months after launching and completing £60,000,000 of secured loans. * August 2009: The Finance & Leasing Association (FLA) reports that secured loan lending has fallen 84% since 2008. * October 2010: MP George Justice draft
Secured Lending Reform Bill
* December 2010: The Finance & Leasing Association (FLA) reveal secured loan lending sank to £16m. * October 2011: Whiteaway Laidlaw Bank combine with Commercial First and Link Loans to create new lender, Shawbrook Bank. * February 2012: Specialist lender Equifinance enters the market. * May 2012: Secured Lending Reform Bill fails to pass through Parliament. * July 2012: UK's first Secured Loan Index is launched by secured loan broker, Loans Warehouse, and reveals secured lending in the UK reached £150m in the first half of 2012. * September 2012: Secured loan lending is now worth £350,000,000. * December 2012: Secured Loan lender Nemo Personal Finance launches the secured loan market's lowest ever interest rates of 5.592% per annum for employed applicants and 6.54% per annum for self-employed applicants. * February 2013: Shawbrook Bank launches a secured loan product that allows loans up to 95% of property value. * 1 April 2014: the Financial Conduct Authority took over formal regulation of the consumer credit market which included secured loans. Previous to this, secured loans fell under the remit of the Office of Fair Trading and firms issuing and brokering secured loans required no authorisation from the FCA. The FCA's involvement dramatically changed the secured loan landscape by putting into place more protection for the consumer. * 21 March 2016: the FCA introduced The Mortgage Credit Directive which meant all regulated first-charge and second-charge mortgage contracts are treated in exactly the same way. The MCD was set up to protect consumers by governing first- and second-charge mortgage markets (as well as consumer buy-to-lets) under the same regulation, and to provide a harmonised approach to mortgage regulation across the EU. Following the introduction of the MCD mortgage brokers and advisers were required to inform their clients that a second-charge mortgage could be a better alternative to a remortgage or further advance. * 2017 - 2019: Following the implementation of MCD (see 21 March 2016 timeline point) - the secured loan market saw steady growth in activity and consumer demand. At the end of 2019, the 12 month growth trend (as evidenced by the Finance and Leasing association's market statistics) showed a 20% annual growth rate. * 2020 - 2021: COVID-19 had a significant impact on the secured loan market. Due to the uncertainty created by the global Coronavirus pandemic, many second charge mortgage providers paused lending. Those that continued to lend made adjustments to lending criteria to reduce

credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

. In any case, consumer demand for borrowing on a secured loan also reduced due to the economic uncertainty as a result of the pandemic. The lows of the secured loans market were reached in 2020, and 2021 showed gradual improvement as the number of new loan agreements issued increased from 486 in May 2020, to 1,910 in May 2021 (although some way short of the 2,657 of new loans issued in October 2019) * 2022: After what was an uncertain period of activity for the UK secured loans market, 2022 showed not only recovery post the global Coronavirus pandemic, but significant growth vs activities pre-pandemic. Whilst the UK began to see much higher rates o
inflation
than it had seen for a number of years, the

Bank of England base rate A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

had been increased significantly, and the UK housing market started to slow - all of which could be considered negatives - they combined to create an environment where demand and interest in secured loans increased vs earlier years. This resulted in a 52% increase i
new secured loan agreements
for the 12 month period ending 30th June 2022.

United States law

The United States is the global leader in

security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...

law with respect to personal property; in the 1940s, it was the first country to develop and enact the notion of a "unified" security interest. That concept has since spread to many countries around the world after it became evident that it is one of the reasons for why the United States has the strongest economy in the world. For example, to raise money, American ranchers could pledge personal property like cattle in certain ways that historically were impossible or very difficult in Uruguay or most other developing countries. However, US law with respect to security interests in real property is still extremely chaotic and non-uniform. The

Uniform Law Commission The Uniform Law Commission (ULC), also called the National Conference of Commissioners on Uniform State Laws, is a non-profit, American unincorporated association. Established in 1892, the ULC aims to provide U.S. states (plus the District of C ...

in the 1970s and 1980s worked hard to develop

uniform act In the United States, a uniform act is a proposed state law drafted and approved by the Uniform Law Commission (ULC), also known as the National Conference of Commissioners on Uniform State Laws (NCCUSL). Federalism in the United States traditi ...

s to clean it up but the project was a catastrophic failure.Peter B. Maggs, ''The Uniform Simplification of Land Transfers Act and the Politics and Economics of Law Reform,'' 20 Nova L. Rev. 1091, 1091–92 (1996). In the case of

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

, the most common form of secured debt is the

lien A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...

. Liens may either be voluntarily created, as with a

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

, or involuntarily created, such as a

mechanics lien A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property. In the realm of real propert ...

. A mortgage may only be created with the express consent of the

title owner In property law, title is an intangible construct representing a bundle of rights in (to) a piece of property in which a party may own either a legal interest or equitable interest. The rights in the bundle may be separated and held by different ...

, without regard to other facts of the situation. In contrast, the primary condition required to create a

is that

is somehow improved through the

work Work may refer to: * Work (human activity), intentional activity people perform to support themselves, others, or the community ** Manual labour, physical work done by humans ** House work, housework, or homemaking ** Working animal, an animal t ...

or materials provided by the person filing a mechanics lien. Although the rules are complex, consent of the

to the mechanics lien itself is not required. In the case of

personal property property is property that is movable. In common law systems, personal property may also be called chattels or personalty. In civil law systems, personal property is often called movable property or movables—any property that can be moved fr ...

, the most common procedure for securing the

is regulated under Article 9 of the

Uniform Commercial Code The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UC ...

(UCC). This uniform act provides a relatively uniform interstate system of forms and public filing of documents by which the

establishes the priority of their security interest in the

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

of the debtor. In the event that the underlying

is not properly paid, the

may decide to

foreclose Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mort ...

the interest in order to take the

. Generally, the law that allows the secured debt to be made also provides a procedure whereby the property will be sold at public auction, or through some other means of sale. The law commonly also provides a

right of redemption The right of redemption, in the law of real property, is the right of a debtor whose real property has been foreclosed upon and sold to reclaim that property if they are able to come up with the money to repay the amount of the debt. Most U.S. state ...

, whereby a debtor may arrange for late payment of the

but keep the property.

How secured debt is created

Debt can become secured by a

contractual agreement A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

, statutory lien, or judgment lien. Contractual agreements can be secured by either a

purchase money security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...

(PMSI) loan, where the creditor takes a security interest in the items purchased (i.e. vehicle, furniture, electronics); or, a non-purchase money security interest (NPMSI) loan, where the creditor takes a security interest in items that the debtor already owns.

References

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