When a borrower defaults on a secured loan, what can the lender do?

When a borrower defaults on a secured loan, the lender has a legal right to claim the asset used as collateral. This process is referred to as foreclosure when it involves real estate. Secured loans are backed by collateral, meaning that the lender has a claim to the asset if the borrower fails to meet their loan obligations.

This ability to claim the collateral helps mitigate the risk for lenders, as they can recover some of their losses by taking possession of the asset. The collateral serves as a form of security for the loan, ensuring that if the borrower cannot repay, there is a tangible asset that the lender may take to recoup their investment.

Other options, while plausible in certain circumstances, do not directly address the lender's immediate rights upon a borrower's default. For example, reducing the loan balance is not a common immediate response to default; lenders typically prefer to recover the outstanding debt through collateral. Offering a restructuring of the loan terms may occur after a default, but it’s not a guaranteed or initial action. Insuring the loan with federal backing is relevant to loan origination but does not provide a remedy for the lender upon borrower default. Therefore, claiming the collateral is the most direct and immediate remedy available to the lender in the event of a