In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974. These may or may not be regulated by law. The interest rates applicable to these different forms may vary depending on the lender and the borrower. Corporate bonds (may be secured or unsecured).These may be available from financial institutions under many different guises or marketing packages: Unsecured loans are monetary loans that are not secured against the borrower's assets. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate the quality of pledged collateral before sanctioning the loan. The interest rates for secured loans are usually lower than those of unsecured loans. Corporate entities can also take out secured lending by pledging the company's assets, including the company itself. Gold loans are issued to customers after evaluating the quantity and quality of gold in the items pledged. This particular instrument issues customers a line of credit based on the quality of the securities pledged. Other forms of secured loans include loans against securities – such as shares, mutual funds, bonds, etc. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer. In a direct auto loan, a bank lends the money directly to a consumer. There are two types of auto loans, direct and indirect. The duration of the loan is much shorter – often corresponding to the useful life of the car. Similarly, a loan taken out to buy a car may be secured by the car.

In the case of home loans, if the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. The lender, usually a financial institution, is given security – a lien on the title to the property – until the mortgage is paid off in full.

For other institutions, issuing of debt contracts such as bonds is a typical source of funding.Ī secured loan is a form of debt in which the borrower pledges some asset (i.e., a car, a house) as collateral.Ī mortgage loan is a very common type of loan, used by many individuals to purchase residential or commercial property. Although this article focuses on monetary loans, in practice, any material object might be lent.Īcting as a provider of loans is one of the main activities of financial institutions such as banks and credit card companies. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. The interest provides an incentive for the lender to engage in the loan. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. The document evidencing the debt (e.g., a promissory note) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. In finance, a loan is the transfer of money by one party to another with an agreement to pay it back.

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