What is a Security Loan?

Malcolm Tatum
Malcolm Tatum

A security loan is a type of collateralized loan that is granted to a borrower once some type of asset has been declared collateral for the loan. Unlike some other types of loan arrangements, the asset used for collateral may be real estate, securities such as stocks, bonds, and commodities, or other property that can be liquidated with relative ease in order to settle the amount due on the loan. This broader range of potential collateral helps to distinguish a security loan from other types of secured and unsecured loans offered by various financial institutions.

A security loan may benefit borrowers who do not own real estate to use as collateral.
A security loan may benefit borrowers who do not own real estate to use as collateral.

One of the main benefits of a security loan is the fact that someone who doesn’t own real estate, but does own other types of marketable securities, can still secure a loan when needed. Assuming that the applicant has a reasonable credit rating, and there are not any pre-existing claims on the assets presented for consideration as collateral, the process of obtaining the loan is likely to take no more than a day or so. The speed of processing the loan can be very important when the borrower needs to secure funds for some purpose as soon as possible.

Real estate may be used for collateral on a security loan.
Real estate may be used for collateral on a security loan.

Another advantage of a security loan is that the rate of interest charged is usually less than the interest charged on an unsecured loan. This is because the lender is assuming less of a risk when making the loan. In the event that the borrower defaults, the lender is assured of being able to recoup the loss, since the market value of the collateral will be sufficient to settle the outstanding debt. Assuming that no unforeseen events have taken place to undermine the marketability of the pledged asset, the default can usually be settled in a relatively short period of time.

As with other types of secured loans, the various assets pledged as collateral for a security loan must remain in the possession of the borrower for the duration of the loan. For example, if shares of stock are pledged as collateral for the loan, the borrower cannot sell those shares without the express permission of the lender. Typically, if the borrower does wish to sell the assets, he or she must provide some other asset for consideration as collateral to the lender. If the lender finds the asset valuable and marketable enough to justify the remaining amount due on the loan, there is a good chance that the borrower will be granted permission to sell the shares, and the alternative collateral noted on the amended loan agreement.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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