Secured Creditor

What Is a Secured Creditor?

A secured creditor is any creditor or lender associated with an issuance of a credit product that is backed by collateral. Secured credit products are backed by collateral. In the case of a secured loan, collateral refers to assets that are pledged as security for the repayment of that loan. In the event that a borrower defaults on the repayment of a secured loan, assets are forfeited to the secured creditor.

Understanding Secured Creditors

Secured creditors can be various entities, although they are typically financial institutions. A secured creditor may be the holder of a real estate mortgage, a bank with a lien on all assets, a receivables lender, an equipment lender, or the holder of a statutory lien, among other types of entities.

If a borrower defaults on a secured credit product, the secured creditor has a legal right to the secured asset used as collateral. The secured asset may be seized by the secured creditor and sold to pay off any remaining obligations. The pledged collateral adds a second source of repayment for the creditor, which means that there is a lower risk to the creditor for extending the offer of credit (this is also why interest rates may be lower for secured credit products and secured loans).

Secured Personal Loans vs. Secured Institutional Loans vs. Secured Corporate Bonds

While financial institutions may issue secured loans to both consumers and businesses, the type of collateral they accept depends on the borrower.

Many financial institutions offer consumers the option of secured personal loans. Common types of collateral accepted by secured lenders include real estate, cars, jewelry, and art. Secured personal loans generally have lower interest rates because they are backed by collateral (and thus pose a lower risk for the lenders). This typically results in lower interest rates for the consumer.

Secured creditors are given priority over junior creditors if an institutional borrower becomes insolvent. If a company liquidates, the collateral associated with a secured credit deal can only be used to pay off the secured creditors. Notably, the assumption is that the fair market value of the collateral is higher than the loan amount, but if it is lower, then the debt is only partially paid. So, the risk profile is highly improved but not eliminated.

Businesses with a low risk of default may pledge various types of collateral in credit deals. This is to their advantage because it helps them obtain credit financing at the lowest possible interest rates.

Syndicated loans can also be structured to include provisions for collateral. With a syndicated loan, multiple investors participate in a structured loan. The company and its underwriters may use collateral to offer certain investors lower-risk terms (or the entire syndicate may be backed by collateral to comprehensively lower the risk for all borrowers involved).

In addition to personal and institutional loans, secured creditors may also offer corporate bonds as a type of secured credit product. Corporate bonds can be backed by collateral through certain loan provisions. As an investment, corporate bonds that are backed by collateral are considered lower-risk for investors. Corporate bonds are structured and issued on behalf of a corporation through an underwriter.

Special Considerations

In a secured credit deal, the contract terms typically include a provision that allows the lender to obtain a lien on the collateral property. A lien grants a lender the legal right to seize assets or property that have been designated as collateral in order to satisfy a debt if the payment terms are not met. A lien allows the lender to easily obtain legal approval from the courts to seize the property.