SWOT analysis of secured loans

Secured loans are loans taken out against an asset belonging to the borrower as collateral (http://en.wikipedia.org/wiki/Secured_loan). This means should the borrower default, the lender has the power to seize this asset and sell it to satisfy the debt owed by the borrower. This type of loan has many strengths and weaknesses when compared to unsecured loans, which do not require an asset be nominated as collateral, and in fact usually go purely off credit rating. Here we try to do a basic SWOT of the secured loan options.

From a borrower?s point of view, a secured loan is much easier to obtain than an unsecured loan. Using property as collateral is common practice, as many people in the UK own their own homes, and because it is probably the most value asset that the average family has. Because there is very little chance of this asset disappearing (however since the credit crunch house prices have taken a huge hit), a lower rate of interest can be charged, as the lender is confident that the money owed will be returned in the end, one way or another, and can afford to be patient.

From a lenders view, secured loans are also favourable to unsecured loans because of their secure nature. Even in the current economic climate, houses are still worth a considerable amount of money, and are still a favoured asset when secured loans are made. Should a borrower default, the house can be repossessed and sold on to cover the debt owed by the borrower.

On the other hand, secured loans are usually repaid over a lengthy period of time, meaning that the borrower can be in debt for quite a few years.
In the eyes of the lender, there is the risk that the asset when seized, has depreciated in value since the loan was made. The RBS has announced that they will be giving borrowers who have fallen behind six months more time (http://www.agentcities.net/category/personal-loans/) to find the money to repay, and this is most likely due to the poor housing market brought about the credit crunch. At the end of the day they want the money to come back to them, and selling a house is a lengthy process these days.

The main opportunity presented by secure loans is the ability to reliably borrow more than ?15 000, something which is of great difficulty to obtain with an unsecured loan.
If the value of the asset goes up, and the borrower defaults then there is an opportunity for the lender to make a sizeable profit off the selling of the asset put forward as collateral. The most obvious and also main threat to a borrower who takes a secured loan is the possibility of defaulting and losing the asset put forward as collateral, which usually, is the family house. Should the borrower default this will be taken to be sold to pay off the debt owed to the lender by taking the loan in the first place.
Should the borrower default, the lender can seize the main asset. However, the asset could have depreciated in value or even have been destroyed by a disaster (however rare this may be). This leaves the lender with little to no money from seizing the asset and in fact a loss from lending the borrower the money, with no opportunity to make up the money lost from the borrower in question.