When you apply for a secured loan, you must provide your lender with collateral. Your collateral can be your home, car or retirement accounts. Secured loans often come with a lower interest rate because they present less of a risk for the lender.
Significance
In the event you fail to meet your financial obligations to your lender, the lender reserves the right to repossess your collateral as payment for the debt. If, for example, you pledged your home title against a secured loan, the lender may force you into foreclosure in order to recover the amount you owe. If you pledged your car, your lender has the legal right to repossess the vehicle.
Effects
If the value of your collateral is not enough to satisfy the full amount you owe, the lender may file a lawsuit against you for the balance. Should the court decide in favor of the lender, it will grant the lender a judgment. In many states, court judgments give lenders the right to garnish your wages or seize your bank accounts.
Considerations
Even if you did not pledge any of your assets as collateral on a loan, your creditor may still be able to seize collateral through a lawsuit. A successful judgment in many states gives unsecured creditors the right to place liens against your personal property and subsequently seize the property.
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