What it is:
How it works/Example:
Here's another example: let’s assume you would like to borrow $100,000 to start a business. Even if you have an excellent credit rating, a bank may be reluctant to lend you the money because it may be left with nothing if you default on the loan. Thus, although banks may attempt the lengthy and expensive process of suing you in that circumstance, the bank may require $100,000 of collateral in order to lend you the money. This collateral might consist of financial instruments, houses, or even objects such as art, jewelry or other items. You might also pledge your business as well. When you pledge these assets, you are securing the debt.
If you do in fact default on the loan, the loan agreement gives the lender the right to seize and then sell the collateral in order to recover any outstanding balance.
Why it matters:
Secured debt gives unsecured loans. The bears less risk. However, the type and amount of security required for a given loan is often a matter of negotiation between the and borrower. For instance, a might require a borrower to collateralize any assets purchased during the loan period. In some cases, for one can also be for other obligations (this is called cross-collateralization). This often occurs in transactions, where a house collateralizes more than one .a sense of security, which is why secured debt often receives better interest rates than