When reading this blog, a reader may find the term “secured loan” sprinkled throughout the posts. Many people are unsure of what exactly makes a loan secured. It’s actually a pretty simple concept. A secured loan is a loan that is based upon some kind of collateral. For instance, a car title loan is a secured loan. This is because the lender holds onto the title of the vehicle throughout the duration of the loan. By holding onto the title, the lender can be sure that he or she will be able to recover funds if the borrower were unable to pay off the loan. This makes the loan secure.

An unsecured loan is when there is no collateral. A good example of this is a loan that takes place between two friends. This loan is based upon the borrower’s word rather than any collateral. If the borrower fails to pay back the friend (lender), the lender is out of luck. There is no backup plan to recover the funds of the loan.

That’s pretty much all there is to it. Think of collateral as security. A lender obviously feels more “secure” when a loan transaction occurs based upon collateral.