2.1.5.1. Types of credit
secured by commercial banks
a. Secured loan
A secured loan is a loan in which the borrower pledges some
asset (e.g., a car or property) as collateral (i.e., security) for the loan. A
secured loan is a loan in which the borrower pledges some asset (e.g. a car or
property) as collateral for the loan, which then becomes a secured debt owed to
the creditor who gives the loan. The debt is thus secured against the
collateral in the event that the borrower defaults, the creditor takes
possession of the asset used as collateral and may sell it to regain some or
the entire amount originally lent to the borrower for example, foreclosure of a
home. From the creditor's perspective this is a category of debt in which a
lender has been granted a portion of the bundle of rights to specified
property. If the sale of the collateral does not raise enough money to pay off
the debt, the creditor can often obtain a deficiency judgment against the
borrower for the remaining amount.
b. Unsecured loan
The opposite of secured debt/loan is unsecured debt, which is
not connected to any specific piece of property and instead the creditor may
only satisfy the debt against the borrower rather than the borrower's
collateral. Unsecured loans are monetary loans that are not secured against the
borrowers assets (i.e., no collateral is involved). These may be available from
financial institutions under many different guises or marketing packages. Bank
overdrafts are classified in this category. An overdraft occurs when money is
withdrawn from a bank account and the available balance goes below zero. In
this situation the account is said to be "overdrawn". If there is a prior
agreement with the account provider for an overdraft, and the amount overdrawn
is within the authorized overdraft limit, then interest is normally charged at
the agreed rate. If the negative balance exceeds the agreed terms, then
additional fees may be charged and higher interest rates may apply.
c. Mortgage loan
A mortgage loan is a very common type of debt instrument, used
to purchase real estate. Under this arrangement, the money is used to purchase
the property. Commercial banks, however, are given security; a lien on the
title to the house, until the mortgage is paid off in full. If the borrower
defaults on the loan, the bank would have the legal right to repossess the
house and sell it, to recover sums owing to it.
In the past, commercial banks have not been greatly interested
in real estate loans and have placed only a relatively small percentage of
assets in mortgages. As their name implies, such financial institutions secured
their earning primarily from commercial and consumer loans and left the major
task of home financing to others. However, due to changes in banking laws and
policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make
home mortgage loans on a more liberal basis than ever before. In acquiring
mortgages on real estate, these institutions follow two main practices. First,
some of the banks maintain active and well-organized departments whose primary
function is to compete actively for real estate loans. In areas lacking
specialized real estate financial institutions, these banks become the source
for residential and farm mortgage loans. Second, the banks acquire mortgages by
simply purchasing them from mortgage bankers or dealers.
In addition, dealer service companies, which were originally
used to obtain car loans for permanent lenders such as commercial banks, wanted
to broaden their activity beyond their local area. In recent years, however,
such companies have concentrated on acquiring mobile home loans in volume for
both commercial banks and savings and loan associations. Service companies
obtain these loans from retail dealers, usually on a nonrecourse basis. Almost
all bank/service company agreements contain a credit insurance policy that
protects the lender if the consumer defaults.
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