Page 65 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes 3.9.1 Types of loans granted by commercial banks

Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the
creditor takes possession of the asset used as collateral and may sell it to regain some or all of the
amount originally lent to the borrower, for example, foreclosure of a home. From the creditor’s
perspective this is a category of debt in which a lender has been granted a portion of the bundle
of rights to specified property. If the sale of the collateral does not raise enough money to pay off
the debt, the creditor can often obtain a deficiency judgment against the borrower for the
remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected
to any specific piece of property and instead the creditor may only satisfy the debt against the
borrower rather than the borrower’s collateral and the borrower.
Mortgage loan

A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under
this arrangement, the money is used to purchase the property. Commercial banks, however, are
given security - a lien on the title to the house - until the mortgage is paid off in full. If the
borrower defaults on the loan, the bank would have the legal right to repossess the house and
sell it, to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and have
placed only a relatively small percentage of assets in mortgages. As their name implies, such
financial institutions secured their earning primarily from commercial and consumer loans and
left the major task of home financing to others. However, due to changes in banking laws and
policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on a
more liberal basis than ever before. In acquiring mortgages on real estate, these institutions
follow two main practices. First, some of the banks maintain active and well-organized
departments whose primary function is to compete actively for real estate loans. In areas lacking
specialized real estate financial institutions, these banks become the source for residential and
farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from
mortgage bankers or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity beyond their
local area. In recent years, however, such companies have concentrated on acquiring mobile
home loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a non-recourse basis. Almost all
bank/service company agreements contain a credit insurance policy that protects the lender if
the consumer defaults.

Did u know? In the past, commercial banks have not been greatly interested in real estate
loans and have placed only a relatively small percentage of assets in mortgages.

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