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 to take the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit 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
One popular type of secured loan that is normally only available at a bank or credit union is the savings secured loan. In this type of loan, the borrower must have a savings account with the creditor. A portion of the money in this account is used as collateral to secure a loan equal to the amount pledged. This money is then frozen in the account but continues to earn interest. As the loan is repaid the secured portion of the savings account is freed. This has advantages for both the creditor and the borrower. If the borrower defaults on the loan the collateral is already in the creditor's possession so it is a very low risk. As a result, the creditor usually offers a much lower interest rate. The disadvantage of this type of loan is that it is limited by the available fund in the savings account.
A mortgage loan is a secured loan in which the collateral is property, such as a home.
A nonrecourse loan 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 foreclosure 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.
Sourse: Wikipedia
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