Loan Security - Lenders cover against loss on finance
Loan security is a guarantee offered to a lender to assure them that if the borrower defaults on the finance lent, they will have an avenue to pursue when attempting to recover their capital. The guarantee is usually something that retains its value over time such as property. When a loan is applied for the lender may ask for protection for the loan before agreeing to lend the finance. The security, usually the borrowers home, could be seized or sold in the event of the loan being defaulted on or simply not paid and attempts at contact ignored. This process involves the law and the courts, customers will be given ample opportunity to repay their arrears or arrange to pay them subject to agreement with the lender.
There are two main types of loan that are available in the UK, Unsecured Loans and Secured Loans.
Unsecured Loans
Unsecured loans are finance that is repayable at a fixed rate of interest. UK unsecured loans are not linked to any underlying security, such as property, meaning that the lenders have to pursue the customers in the county courts to recover debt in the event that customers failing to repay the loan or default.
Secured Loans
Secured loans are loans that are protected by being secured on an already mortgaged property. With the UK secured loan, the property may be at risk of being seized and sold if borrowers do not keep up with repayments. How much the sold property raises as nothing to do with the value of the property since the courts may insist on a quick sale. The finance lent will then be used to repay the outstanding creditors.
Loan Securities Example
In UK law there is nothing requiring that security has to be provided for a loan, and certainly nothing that requires the borrower's home.
Lenders of finance however may require security for loans of reasonable size, depending on the credit status of the borrower.
Lenders prefer the security of land and property as they establish their value and retain this value over time.
Security Information
The lender may be prepared in certain circumstances to accept other forms of security, such as other land or buildings, a policy of life assurance or personal property such as jewellery and other valuables depending on the size of the loan that's required and the credit status and history of the borrower.