This type of financing utilizes a tangible asset, such as real estate or equipment, as collateral to secure a loan. For instance, a mortgage on a residential property uses the property itself as collateral. If the borrower defaults on the loan, the lender can seize and sell the property to recoup the outstanding debt. This arrangement provides lenders with a degree of security, mitigating the risk associated with lending.
The inherent security offered by this financing method often translates to lower interest rates and potentially higher borrowing amounts compared to unsecured loans. Historically, it has been a cornerstone of economic growth, facilitating major purchases and investments, from homeownership to business expansion. The stability and predictability of these loans have contributed significantly to the development of modern financial systems.
