Secured Creditor – Definition

Cite this article as:"Secured Creditor – Definition," in The Business Professor, updated September 9, 2019, last accessed December 4, 2020,


Secured Creditor Definition

A secured creditor is any lender which offers loans or credit products backed by collateral. They can also be associated with investments in such credit products as long as the borrower has collateral to back up a request. These creditors have a first-order claim (exclusive right) on the returns of a disturbed credit investment. In a situation where a borrower cannot afford to pay his loan within the even period in an agreement or defaults in terms of other factors, the secured creditor is embodied with the legal right to the collateral provided by the borrower at the period of the loan agreement. The secured creditor is then expected to sell off the collateral to pay off any remaining amount which has not been refunded by the borrower.

A Little More on What is a Secured Creditor

A secured creditor needn’t be a single individual. Different entities can offer to be secured creditors as can be seen with banks. Most financial institutions which act as lenders often associate loans with collaterals. This way, they can prevent substantial losses in case the client or borrower defaults on payment. Some secured credits also have different structures which don’t make them look as such from hindsight. Examples of these structured secured credits include corporate bonds and syndicated loans.

In a secured credit, the terms of the loan include an agreement which permits the creditor to obtain the lien (legal right to property) of the collateral property which allows them to take full control of the property if the borrower is unable to pay up his debt. This lien allows the creditor to do this with the consent of the court, and an absence of this agreement will make the property rights transfer abortive. These collaterals are mostly included in the loan agreement so that lenders can find ways to recover their money if borrowers default on payment. Thus, it serves as a second source of loan fulfillment if the borrower cannot meet up with the first. Most businesses (which acts as borrowers) with low risks of defaulting will be willing to sign up different assets in order to get the lower interest rates possible. This way, lenders will be more willing to reduce the interest rates with hopes that they’ll default, while these businesses are happy that lenders are doing this because they know they have no chance of defaulting.

Senior debts in capital financing structure are also similar comparisons for secured loans. Senior debts are usually secured loans, with a number of them being unsecured with payment provisions. Secured creditors know that they’ll be paid even if the borrower defaults, and as such are willing to give out as many loans as possible. In a case where the borrower is a company which is in the process of liquidation, the collateral which was used in acquiring a loan will be sold and used in paying off the secured creditor. In a case where a senior loan is unsecured, secured collaterals would not do the trick of actin as a second payment source. If a company wishes to order loans in separate parts from the same creditor, they can issue two liens to two different collaterals for two loans. That is, they will provide different collateral for both loans as well as different liens to allow the lender to take control in case of defaults.

Secured Personal Loans

Unlike business loans, personal loans can be quite small; thus, they command a low-interest rate. Secured personal loans often use real estates, jewelry, cars, and artworks as collateral in case borrowers default.

Secured Loans and Institutions

We earlier stated that the personal loan is different from business loans due to the size, and this is something that financial institutions enjoy at all times. Secured creditors prefer to strike deals with business entities as they have a lot of means which would serve as collateral for the loan. Most of the collateral might include landed properties or equipment. Businesses can decide to sell these loans in secondary markets to smaller entities, thus providing them with the same collateral security.

Secured Syndicated Loans

Syndicated loans are typically granted to a pool of borrowers. In this case, most borrowers are investors, and their large numbers make it easier for financial institutions to charge lower rates. The financial institution might get to offer individuals different rates based on their collateral, but in most cases, the syndication approaches the institution as a group, thus backing loans with all-for-one, one-for-all collateral.

Secured Corporate Bonds

Corporate bonds can be backed by collateral to reduce the associated risks. In issuing corporate bonds, companies hire underwriters who help them to build bonds with collateral. Just like secured loans, secured bonds can be auctioned at the secondary market after being issued. This way, the risks associated with secured corporate bonds will be a bit lower to acquirers as the bond is still backed by the collateral provision.

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