Secured Loan: Its Types, Features And Eligibility You Should Know

What is a secured loan?

Secured loans are a type of debt where the borrower pledges their moveable assets as collateral to obtain the required funds. Applicants for secured loans benefit from flexible terms and low-interest rates. This is so that the bank can profit from the applicant’s lower risk profile and security. If you default to repay the loan, it will lead to a loss of security. These loans can be used for several things, like starting a new business, purchasing a home, or a new car. 

Why are there secured loans in the market?

Why would someone avail of a secured loan when there are unsecured loans easily available? Well because

• Lenders are partially freed of the possible financial loss they can suffer as a result of a payment default.
• Due to the commitment of an asset, borrowers are qualified for larger loans with better terms and cheaper interest rates.

What are the types of secured loans?

1. Mortgage Loans
2. Non-recourse loans
3. Car loans
4. Home loans

Features of secured loans

• Loans are made based on the assets’ ownership titles, used as collateral.
• Low-interest rates because the bank is more confident in your ability to repay the loan.
• A wider range of repayment alternatives.
• Both fixed and variable rates are available.
• Faster loan approval.
• Loans can be tailored to meet some needs.
• Unemployed individuals can also apply for these loans.
• A guarantor is not required.
• Assets can be repossessed by lenders in case of a payment default.
• Increases CIBIL score when the loan is fully repaid.

Eligibility criteria

• The minimum age of the individual should be 18.
• The applicant must be an Indian citizen.
• The applicant must have a minimum yearly income of Rs. 3 lakh.
• For loans based on business income, the enterprise must have been profitable for the last three years.
• The applicant must possess assets with a value equal to or greater than the loan amount required.

Documents required

• ID Proof: Voter Card / Aadhaar Card / Passport / PAN Card
• Age Proof: Passport / Driver’s License / Aadhaar Card
• Residence Proof: Utility Bills / Rent Agreement / Passport
• Income Proof: Salary slips for the last 3 months or IT returns or Form 16
• Bank Statement: Bank Statement for the last 6 months
• Proof of Signature
• Property Papers (as collateral)
• Passport size photographs
• Duly filled application form

Benefits of secured loans

• Because the bank knows you want to preserve your collateral, interest rates are lower. If banks are confident that their investment in you is secure, they will lend money at reduced interest rates. 
• The bank’s responsibility and risk are significantly decreased, allowing for the sanctioning of larger loan amounts. 
• The bank offers better terms and conditions. Faster documentation and clearance, simpler and less expensive processing, and overall friendlier conditions that don’t abandon you in the lurch in case something goes wrong.
• If you have flexible repayment terms, you won’t have to worry about penalties and fees for settlement payments, pre-closing your loan, making a large payment that significantly lowers your capital, or even if you wish to prolong the duration of your loan. 
• Can be used by people with poor credit histories or low CIBIL scores because both of these indications essentially indicate how likely you are to be able to repay your loan. When a collateral asset is involved, the bank’s need to know whether you can or cannot repay your loan is no longer relevant. 
• Since interest is tax deductible, you can keep more money you would have otherwise lost to taxes.
• The minimum income needed is far lower than for unsecured loans because it also serves as a measure of your capacity to repay.

Disadvantages of secured loans

• The bank will not hesitate to seize all the assets you have pledged as security, even when it approves a larger loan amount and a lower interest rate. Your readiness to relinquish the pledged asset must match your readiness to accept the loan. You must be prepared to lose the home you live in, the vehicle you drive, and the possessions that support your lifestyle.
• In the case of a secured loan, for example, you would be using the vehicle as collateral in case you were to default on the loan. This implies that if you skip a payment or otherwise default, the bank will seize your new car, and all previous EMI payments will be deemed invalid. You will be left stranded and bankrupt after losing the automobile and the entire amount you paid toward it (plus interest). 
• To qualify for a secured loan, you must submit numerous documents, including verification of your identity, age, and address, as well as those about the ownership of your asset. 
• The asset must be wholly held by the person requesting the loan, free and clear of all EMIs and partnership agreements.
• Longer loan repayment terms allow for more fluctuations in your overall income; even a minor decline could impact your repayment schedule. 
• The loan you want must be repayable with the proceeds from the sale of the item you intend to pledge as collateral. 
• If you miss a payment on a secured loan, your CIBIL score will be severely impacted. Your credit score and rating could suffer if the bank needs to confiscate your home and other assets, and it might be quite challenging to recover from that.

The Bottom Line

In times of extreme necessity, secured loans can help, but they must be used carefully. Until the loan is fully repaid, the asset pledged as collateral must be regarded by the borrower as the bank’s property. Before taking a defaulter’s collateral, banks won’t think twice and act nearly like sharks around a boat, waiting for someone to jump off. The interest rates, repayment plans, terms, and circumstances are unmatched by any unsecured loan if you are sure of your ability to pay back the loan when due each time.

To read more about offers of Home Loans, Secured & Unsecured Business Loans, Corporate Loans and various other loans with lower EMIs at great interest rates, visit Piramal Finance.