What Is a Secured Note?

A Secured Note Explained

By Jamie Johnson
Updated on April 21, 2022
Reviewed by Andy Smith
Couple signing loan paperwork with their agent
Photo:

Kerkez / Getty Images
Definition
A secured note is a loan or corporate bond that is backed by collateral. If a borrower stops making payments on the loan, the lender can put a lien on the collateral to recoup the money lost.

A secured note is a loan or corporate bond that is backed by collateral. If a borrower stops making payments on the loan, the lender can put a lien on the collateral to recoup the money lost.

Learn more about how secured loans work and how they can affect you.

Definition and Examples of a Secured Note

A secured note is a loan or corporate bond secured by some type of collateral. This collateral makes it a less risky investment. The collateral gives investors a way to recoup their funds. If you are unable to pay back the loan, the lender can put a lien on your collateral until you do. In some cases, they may be able to repossess it.

Corporations often issued secured notes to raise capital debt. Since the debt is secured, borrowers often receive a lower interest rate. That’s because the collateral protects the lender against the risk of default.

Common types of collateral are real estate, equipment, and investments. For example, if you take out a mortgage, your home is the collateral for the loan. For an auto loan, your car is the collateral.

Note

Unsecured notes aren’t backed by collateral. They are riskier for lenders.

If you choose to take out a secured note, it’s important to select your collateral wisely. If the loan goes into default, you are at risk of losing whatever collateral you used to back it.

How a Secured Note Works

If you default on a secured loan, your collateral can be liquidated to repay your debt. For this to work, the collateral must be something that’s worth the same amount as the loan.

For example, when you buy a home using a mortgage, the loan is secured by the house and property. This gives your lender a tangible asset to claim if you are unable to pay back your home loan. If you default on the mortgage, the lender can seize your home. If you can pay back the mortgage, your lender will release any claim to your property. Otherwise, you could lose your home.

If the collateral doesn’t fully cover the cost of what you owe, the lender can try to get the rest of their money back. They would do this by pursuing what is known as a “deficiency judgment” against you. If they win, you could have to pay back the remainder of the loan out of pocket.

Secured Debt vs. Unsecured Debt

Secured Debt Unsecured Debt
A loan or corporate bond backed by collateral A loan or corporate bond that isn’t backed by collateral
Less risky to the lender Presents more risk to lenders
Typically comes with low interest rates Typically comes with higher interest rates

Because the collateral in a secured loan protects the lender from default, these loans are considered less risky. Borrowers who take out secured notes will often receive lower interest rates. These loans also can be easier to obtain.

In comparison, an unsecured note is riskier for the lender. Borrowers often pay higher rates to compensate for the additional risk.

Note

If you have poor credit, you may find it easier to qualify for a secured loan, and you’ll likely qualify for a higher loan amount than if you took out an unsecured loan.

Types of Secured Notes

Many common types of loans are secured notes.

Mortgage

When you take out a mortgage, the home you purchase is used as collateral to secure the loan. If you default on your mortgage, your home will go into foreclosure, and you could lose your home.

Auto Loan

Like mortgages, when you take out an auto loan, the car you purchase is used as collateral for the loan. If you don’t repay your loan, the lender has the right to repossess your car. The same is true for loans taken out on boats, motorcycles, and any other type of vehicle.

Home Equity Loan

Like a mortgage, a home equity loan uses your house as collateral for a secured loan. You may get a one-time lump sum, or you could use your house to back a line of credit. Either way, if you can’t repay your loan, the lender can foreclose on your home.

Key Takeaways

  • A secured note is a loan or corporate bond backed by collateral, so it’s less risky to investors.
  • An unsecured note is not backed by any type of collateral, and is a riskier investment.
  • If you default on your loan, the lender can claim your collateral as repayment.
  • Many common types of loans are secured notes, such as mortgages and auto loans.
Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

  1. National Foundation for Credit Counseling. "The Difference Between Secured and Unsecured Debt and Which You Should Pay First." Accessed Jan. 3, 2022.

  2. MyCreditUnion.gov. "Personal Loans: Secured vs. Unsecured." Accessed Jan. 3, 2022.

Related Articles
Image shows four icons: a home sitting on top of money, a hand signing an application, a credit card bill, and an ATM in overdraft. Text reads: "4 types of lines of credit: Home equity lines of credit (HELOC): Borrow as much money as you need with your home's equity as collateral. Personal lines of credit: Draw money when keededvia an access card of ATM, or written checks. Credit card lines of credit: Borrow money within your credit card limit. Overdraft lines of credit: Borrow small amounts of money when you overdraft your checking account."
How a Line of Credit Works
A man hangs a picture on a wall.
What Is a Security Interest?
Two people shaking hands with various icons, including a hand waving, a hand doing thumbs down gesture, an envelope with money sticking out, and a bank-like structure, illustrating a headline that reads, "What do Know About Secured Loans," with text that reads, "including a good way to build credit, provided you go through a reputable lender (like a bank). Types of secured loans include mortgages and car loans. It’s important to carefully consider what you’ll use as collateral, and make sure you can make your payments. Generally intended for those who have been denied unsecured loans. Be careful not to overextend yourself—the plan might backfire."
What Is a Secured Loan?
Couple signing a loan agreement
What Is a Secured Creditor?
A family stands on the driveway in front of a recently built home.
What Is a Second Mortgage?
A man helps a baby walk while a woman sits on the floor smiling at them.
Is a Mortgage Secured or Unsecured Debt?
Image shows four icons of two homes, a home and a red check mark, a person wearing a hard hat holding a hammer, and a hand holding an envelope. They each have corresponding captions. Text reads: "Criteria for home equity loan tax deductions: Loan must be on 'first or second' home. Loan must be secured by your home. Possible to reduce costs on construction of a home. Per the IRS, 'both you and the lender must intend that the loan be repaid.'"
Is Home Equity Loan Interest Tax-Deductible?
A couple listens to music at home.
What Is a Reverse Mortgage?
A plan that puts the best financial choices in your hands.
Secured Loans vs. Unsecured Loans: What's the Difference?
Small gray house with white trim on a green lawn.
What Is Collateral?
A borrower looks over her secured loan options.
Pros and Cons of Secured Personal Loans
A person writes on a sheet of paper in a kitchen.
What Is a Non-Recourse Loan?
A man sitting on a sofa using a laptop on the coffee table as he sorts through a stack of bills and statements
Should You Use a Home Equity Loan To Pay Off Debt?
Businesswoman looking at laptop while sitting at desk
What Is a Note in Finance?
Smiling couple in room under construction shaking hands with contractors
What Is a Junior Mortgage?
Cheerful females soldier greets bank manager
What Are Unsecured Loans?