What is a 'Secured Note'

A secured note is a type of loan that is backed by the borrower's assets. If a borrower defaults on a secured note, the assets it has pledged as collateral can be sold to repay the note. This feature decreases the risk associated with secured notes, so lenders earn a lower interest rate than they would earn with riskier issues such as unsecured notes. With an unsecured note, the borrower does not pledge any assets as collateral, so it must pay the lender a higher interest rate in order to compensate them for the increased risk.

BREAKING DOWN 'Secured Note'

If you have a mortgage or an automobile loan, you are the holder of a secured note. In the case of a mortgage, you hold a secured note with your home pledged as collateral. If you fail to make your mortgage payments, the lender can seize your home. In the case of an auto loan, the lender can repossess your vehicle if you stop making your loan payments.

In business, a secured note might be issued by corporation that provides private debt and equity financing to a company looking to expand its business. If the business expansion is unsuccessful, the lender will take the assets that the company pledged to secure the loan, which might include real estate and equipment.

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