What is a Secured Loan? Meaning, Definition, Advantages

In today’s world, staying on top of schemes and loans introduced by banks and the government has become crucial. But unfortunately, many individuals are unaware of the different loans that can aid them. Therefore, they miss out on a lot of life-changing and money-securing opportunities.

A secured loan requires the borrower, you, to put forth an asset or security to avail of the specific benefits attached to the secured loan. If you can’t pay back the money by the due date, you can use this asset as payment instead.

The most common examples of secured loans are car loans and home loans. Banks usually ask you to give collateral when their loan is too large. This helps the bank retain the money disbursed by setting up auctions for the properties or assets they have seized. Again, this allows them to regain what they are owed.

What Purpose Does a Secured Loan Serve in the Market?

What is the use of a secured loan in a financial market when an unsecured loan already exists? There are two main reasons why someone would take out a secured loan and why a lender would offer one:

• Lenders offer secured loans so that they have something to fall back on. They do this to ensure that even if you, as a borrower, default on payments, they can recover the total amount through the collateral you have put forth.
• Individuals take up secured loans because that makes them eligible for larger loans. They are also provided with lower interest rates and more favourable terms, all due to the asset they have given up.

Difference between a secured and an unsecured loan

An unsecured loan is issued not based on collaterals or submitting properties but on your ability to repay the loan you borrowed. For example, you might be asked for a detailed history of your employment and a credit and background check. These help the lender decide whether you would be a good candidate for the loan. A few common examples of unsecured loans are personal loans, student loans, and credit cards.

Different types of secured loans

There are many different types of secured loans; some of them are: secured credit cards, car title loans, mortgage loans, vehicle loans, secure lines of credit, life insurance loans, home loans, car loans, home equity loans, bad credit loans, and share-secured or savings secured loans.

Advantages of Procuring a Secured Loan

• The collateral motivates you to fully pay what you owe: If the bank takes your asset as collateral, you will be heavily motivated to repay the loan. Furthermore, since there is a risk of foreclosure from whichever institution the money is borrowed from, that is reason enough to pay back the money borrowed. 

• Lower rates of interest: Typically, a secured loan comes with a lower interest rate than other types. This is because the borrower is providing collateral and the lender is not taking on much financial risk.

• Tax Deductions: Individuals eligible for some secured loans, like home equity loans or mortgages, can have their taxes deducted at the end of the year. This is due to the interest they are paying on loans.

• Guarantor not required: Since you have already submitted your assets as a substitute, you do not need a guarantor for the loan you are trying to obtain. Also, lending institutions don’t need a guarantor as long as the collateral you give them meets their requirements.

Disadvantages of a Secured Loan

• Risk of losing property or assets: If you cannot repay the loan for some reason, the property or asset you have provided as collateral is at risk of foreclosure by the lender. This makes the threat more significant for you and serves as a potential disadvantage if you cannot repay your loan.

• A loan is for a specific asset: A secured loan can only be used for particular assets you want to purchase, like a car or a property. Apart from that, the money cannot be used for anything else. The only exception to this is a home equity loan.

• Loan rejected in case of no collateral: Your loan application will be immediately denied if you do not own an asset or a property. You need collateral if you are applying for a secured loan. Otherwise, you will have to look into loans that do not require collateral.

• The collateral value should be more than the loan amount: Any property or asset you submit must be verified by the lender. They will determine the value of the loan and then assess if you are eligible for a secured loan. Finally, an appraisal is carried out for the asset, and a fair price is determined that satisfies the lender enough to disburse a loan.

No matter which loan you might be considering applying for, it is always wise to get your documents in order and check if you are eligible for that loan. It is also essential that you find out specific details about the loan, such as:

• If the interest rate of the loan is variable or fixed. 
• The maximum and minimum amount you can borrow. 
• The income and credit requirements for the loan you want to avail.
• The type of asset/property you need to give to avail of the loan. 
• The annual percentage rate and the interest rate of the loan.

There are many different types of loans a person can consider these days. If you want to make an informed decision based on facts and numbers, head to Piramal Finance, an excellent financing solution for individuals looking to secure a loan.