The secured debt is one that is backed by some property of the borrower. That said, in case of default, you will be seized to comply with the pending obligation.
This type of operation is also known as a loan with collateral . Its main characteristic is that it is tied to a collateral asset .
Guaranteed debt compliance
The fulfillment of the guaranteed debt can occur in two ways:
- Possession:When the creditor becomes the new owner of the guarantee .
- Liquidation: The property is sold in exchange for liquidity . Thus, with these funds, the lender is compensated.
It should be noted that the fact that a debt is not guaranteed does not mean that it is unrecoverable. In case of default, the creditor can initiate legal actions to collect the loan. The latter is recurring especially in cards and other personal loans whose amounts are relatively low.
Example of secured debt
The most common secured debt is the mortgage . A loan backed by real estate is offered . If the fees are not paid as established, the creditor can execute the guarantee (house, land or other real estate). For this, a judicial process begins.
This type of ‘safe’ financing is also common in vehicle loans. In this case, the guarantee is the car or means of transport.
Advantages and disadvantages of secured debt
Among the advantages of secured debt is that it allows to realize loans that commit high sums. In addition, it is a way for the creditor to reduce the risk of default.
However, among the disadvantages of this type of financing, it is worth highlighting that it can cause stress among debtors. This, because they will lose the guarantee in case of default.
Also, secured loans are relatively complex in the sense that the creditor must not only assess the debtor, but also the security presented. Said well in some cases it needs to be assessed to estimate its value.
Types of secured debts of a company
When a company acquires a debt, it can back it up in two ways:
- With a property of the company. It may be a good or a collection right against third parties, for example, the pending invoice of a customer.
- With an asset not directly linked to the firm. This happens for example in family businesses, if the owner of the organization offers part of his personal assets as collateral. It is also the case of subsidiary companies, if the loan is backed by a good belonging to the parent company .