The only difference is that the action of repossession and the existence of collateral offer more security and fast retrieval of the funds. Repossession has implication on secured loans that define the limits on the loan terms. The risk reduction that this implies provides with security to the lender but also with many benefits to the borrower. Mainly, unsecured loans are significantly more flexible in terms of loan stipulations.

Collateral: The Concept

Collateral is basically any asset that is legally bound to the loan securing its repayment. Collateral is offered by the applicant or requested by the lender in order to close on a loan with certain advantageous loan terms. When an asset is used as collateral it guarantees repayment of the loan in a direct way. The property remains attached to the loan and the loan to the asset.

Only by the full repayment of the loan the property can be freed. In the event of default, the lender has the legal right and can exercise the legal action of repossession which can be used to attack directly the asset attached to the loan, thus reducing court’s time periods. The risk of repossession also creates a physiological incentive for repayment that shouldn’t pass unnoticed.

The Action of Repossession

This legal action can be exercised only if the borrower defaults on the loan. It provides the lender with the possibility to claim his money and recover it from the value of the property attached to the loan. It’s a simple and fast legal procedure compared to long trials implied in unsecured loan recoveries.

The asset can be sold and the purchase price is used to repay the remaining of the debt. Generally speaking lenders prefer not to exercise this right and will negotiate repayment plans if the borrower is willing to repay. However, the mere possibility of using this tool provides sufficient ease to consider a secured loan applicant to be a significantly lower risk than an unsecured loan applicant.

Lender’s Security

As stated above, both collateral and the action of repossession provide the lender with considerable security compared to unsecured loans. This alone is sufficient justification for the many benefits borrowers obtain with secured loan financing. Nevertheless, ownership alone has many psychological implications too.

A homeowner is a better loan applicant because the sole fact of ownership proves financial responsibility and control over finances. It may sound as a prejudice but truth is that someone who could afford the monthly payments for a home purchase or who could save enough money for the same purpose, represents a much lower risk than a tenant.