Emergencies strike uninvited and often you are forced to dip into your savings to deal with them. A Personal Loan is perhaps the fastest option, but it may work out to be expensive, considering its high interest rate. However, a secured bank loan can help you get the funds you need without burning a hole in your pocket. Let’s find out what is secured loan.
Secured loan definition
One can define a secured loan as a secured borrowing option where you pledge collateral as security against the loan amount. These loans are relatively easier to qualify for, have lower interest rates, and have a longer tenure due to their inherent nature of being a secured lending. Once you pledge the security with the bank, the bank then possesses the ownership deed of the collateral until the loan gets repaid with interest.
How does a secured bank loan work?
Unlike unsecured loans, where your credit score and financial history play a significant role, a secured bank loan depends on the value of the collateral. This collateral gives banks security, enabling them to offer lower interest as compared to unsecured loans. Approval depends on the value of the collateral you pledge and other eligibility criteria.
Also Read: Secured or Unsecured loan - which one should you go for?
Types of secured loans
Some of the common types of secured loans include:
Home Loan - A Home Loan is the easiest way to buy your own residential property and also the most common example of a secured loan. You can get up to 80 per cent of the property value as Home Loan. Even though the purpose of the loan is to purchase property, it is a secured loan because the property is mortgaged with the bank until you repay your loan. If you default on the loan at any point of time during the loan tenure, the bank has the right to possess your home and recover the loan. Though this is often the last resort and the bank will send you reminders before it takes this step.
Gold loan – A Gold Loan that you can use to raise funds against your gold jewellery, coins or bars, is another common form of secured loan. It is a short-term loan, usually between six months and 3 years and is an easy way to meet any emergency fund requirement. You can usually get up to 75% of your gold’s value as loan. In case of default, the bank can sell the gold asset to recover the loan
Auto loans - Auto loans i.e. a Car Loan availed for purchasing a car or a Two-wheeler loan used for purchasing a bike or scooter are also secured loans. Here the purpose of the loan is to buy the vehicle and you may get up to 100% of financing for the vehicle, subject to conditions. The vehicle is mortgaged with the lender until the loan is paid off and the bank has the right to sell the vehicle to recover the loan in case of default.
Loan against securities – Loans can also be availed against financial assets such as Fixed Deposits, shares, debentures and certain kind of life insurance policies. Banks have a list of securities that will be accepted as collateral. The advantage of these loans is that you continue to earn returns on your investments even while you pledge them with the bank to borrow money.
Features of a Secured Loan
Secured loans come with various features that make them unique, including:
Required collateral: Secured loans require eligible collateral to secure the loan, providing a tangible asset that mitigates the risk.
Retained ownership: Despite using collateral, you retain ownership of your asset, enjoying its benefits while repaying the loan.
Lower interest rates: One of the primary advantages of a secured loan is the potential for lower interest rates. Lenders view these loans as less risky due to the collateral, leading to more favourable terms for borrowers.
Flexible loan amounts: Secured loans tend to offer bigger loans than unsecured ones. The value of the collateral determines how much you can borrow.
Eligibility criteria for a Secured Loan
To be eligible for a secured loan in India, you generally need to meet the following criteria:
Age criteria: You need to be 18 years or older to be eligible to apply for a secured loan.
Steady income: Lenders want to ensure you have a loan repayment capacity. A regular and stable income is crucial.
Good credit history: While secured loans rely less on credit scores, good credit history can still positively influence your eligibility.
Valid collateral: The collateral you provide must have a verifiable value. Common examples include property, vehicles, or savings.
What can be a collateral for a loan?
In India, various assets can be collateral for secured loans. The loan amount is a percentage of the current value of the asset. The percentage varies based on the asset used as collateral. The loan can be used for any personal or business purpose.
Property: Residential or commercial property and land are common collaterals for home and mortgage-backed loans.
Vehicles: Cars, motorcycles, or other vehicles can be collateral for auto loans.
Machinery and equipment: In some cases, especially business loans, machinery and equipment can be offered as collateral.
Investments: Financial instruments like stocks, bonds, and mutual funds can be collateral. The value of these investments impacts the loan amount and terms.
Insurance policies: Life insurance policies with a cash value component can be collateral. The cash value acts as security for the loan, and you can repay the loan during your lifetime or have it deducted from the death benefit.
Valuables and collectables: High-value possessions such as jewellery, art, or antiques can be collateral. These items are assessed by their market value, and the loan amount is determined accordingly.
Pros and Cons of Secured Loans
Here are some of the major advantages of taking a secured loan:
Lower interest rates: You enjoy the benefit of lower interest rates compared to unsecured loans.
Higher loan amounts: Secured loans often provide access to bigger loans depending on the collateral value.
Extendable repayment periods: Repayment periods from a few months to even 30 years for mortgage loans can make monthly payments more affordable.
Build credit history: Timely payments on secured loans contribute positively to your credit score.
Here are some of the major disadvantages of taking a secured loan:
Risk of losing collateral: Defaulting on payments puts your collateral at risk of being seized by the lender.
Stringent eligibility criteria: Meeting the eligibility criteria, including a stable income and good credit history is essential.
Lengthy verification process: Secured loans require tedious documentation and verification of your collateral value before approval.
Risk credit history: In case of consistently missed payments, secured loans can affect your credit score.
Documents required to apply for secured loans
When applying for a secured loan in India, you typically need to provide the following documents:
Age proof: Birth certificate, passport, or voter ID
Identity proof: PAN card, Aadhaar card, passport, or driver's licence
Address proof: Aadhaar card, Utility bills, rental agreements, or voter ID
Income Proof: Recent salary slips, income tax returns, or financial statements related to your business
Bank statements: For the last 6 months
Collateral documents: Ownership documents for the collateral
How to apply for a secured loan
Check Eligibility: Ensure you meet the lender's eligibility criteria, including income and credit history requirements.
Prepare collateral documents: Gather all necessary documents related to the collateral.
Fill out the application form: Complete the loan application form accurately, providing all required details online or visit your nearest bank.
Submit documents: Submit the necessary documents along with your application.
Wait for approval: The lender will review your application and documents and do a valuation of your asset before approving the loan.
FAQs
Can I get a secured loan with a low credit score?
While secured loans are more lenient with credit scores, a very low score might still impact your eligibility. The value of your collateral and other factors will be considered.
Do secured loans have lower interest rates?
In general, secured loans offer lower interest rates due to the reduced risk for lenders. However, it's essential to review the terms of each loan agreement carefully.
Are secured loans accepted for everyone?
Secured loans have eligibility criteria, including a steady income and a good credit history. Meeting these criteria is crucial for loan approval.
What happens if I default on my secured loan?
If you fail to make payments, the lender can seize the collateral used to secure the loan. This could result in the foreclosure of a property or repossession of a vehicle. For example, the property could be subject to foreclosure if it's a home loan.
Conclusion
Secured loans can be powerful financial tools for achieving your goals, whether it's buying a home, starting a business, or making a significant purchase. Understanding the intricacies, risks, and benefits is crucial to making informed decisions.
Before signing up for a secured loan, make sure to assess your financial situation, evaluate the terms carefully, and choose a loan that aligns with your goals and capabilities.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
