How does secured lending differ from unsecured lending ?

Posted by admin On December 23rd 2020

Lending is said to be secured when the borrower grants the lender the right to take possession of a named valuable asset if they (the borrower) fail to keep up repayments on their loan. If repayments are missed (and the matter cannot be resolved in any other way) the lender can then sell the asset to retrieve the money owed.

Security for a loan does not have to take the form of a property itself, contrary to expectations. With commercial loans, the loan might be secured against business equipment or premises. Financial assets such as shares or other investments may also be used in these situations, should the lender want to prevent or reduce any loss.

With regards unsecured borrowing, however, the lender does not have that reassurance or guarantee of an asset that they can sell to recoup the loan if the borrower fails to repay it. The lender has to rely entirely on the borrower’s agreement to repay. For this reason, unsecured borrowing is a greater risk to the lender, and rates of interest on these types of loans tend to be higher than those for secured loans.