What is Secured Creditor? Definition of Secured Creditor, Secured Creditor Meaning
The secured creditor is a natural or legal person whose right to collection is backed by a guarantee . This can be, for example, a mortgaged home or other seizable asset.
Thus, in the event of non-payment, the creditor may execute the guarantee and ensure the reimbursement of the credit granted. Although the protection is not necessarily complete. In other words, the entire loan is not always recovered, but only part of it.
It should be remembered that a creditor is any individual or company with the power to demand the fulfillment of an obligation. This term is used especially for credits extended by financial entities.
It is also worth noting that the guarantee is, in general, a mechanism to protect the rights of a lender. Thus, with the backing of a third party or an asset (which can be sold to obtain liquidity ), compensation or the maximum reduction of eventual damages caused by the debtor is ensured.
Types of secured party
There are two types of secured party:
- With full guarantee: If the debt that the creditor must collect is fully covered. This happens, for example, in the case of mortgage loans where the guarantee is the house itself.
- With partial guarantee: If only part of the debtor's obligation is fulfilled. Suppose, for example, that the loan has been for $ 20,000 and the collateral presented is a car with a value of $ 10,000.
Key aspects of the secured party
Among the key aspects of secured creditors, their presence in high-amount operations, such as mortgage loans, stands out . In this way, financial institutions reduce the risk of their activity.
We must also take into account that if the loan has a guarantee , the probability of default is reduced. Therefore, the interest rate , which determines the financial expense, should be lower.