Final answer:
A long-term loan that is secured by collateral, such as property or equipment, is known as a secured loan. The collateral provides security to the lender, ensuring that the borrower is motivated to repay the loan or risk losing the pledged asset.
Step-by-step explanation:
A long-term loan against which collateral has been pledged is known as a secured loan. Collateral refers to something valuable—often property or equipment—that a lender would have a right to seize and sell if the borrower does not repay the loan. It provides security to the lender that the borrower will meet the repayment obligations; in the event that the borrower defaults, the lender has the right to take possession of the collateral and use it to recover the unpaid amount of the loan.
This concept is significant in both personal and commercial finance, and it forms a fundamental part of the loan market. For instance, when a family takes out a 30-year mortgage loan to purchase a house, the house itself serves as collateral for the loan. If the borrower fails to make payments, the lending institution has the legal right to foreclose on the home.
The loan market is divided into two main segments: the primary loan market, where borrowers obtain loans from financial institutions, and the secondary loan market, where loans are bought and sold among financial institutions. The sale of loans on the secondary market allows for the redistribution of capital and risk among financial entities.