What Is A Secured Loan? All The Things You Should Be Aware Of

Running around the clock's hands, it's a fast-moving world where the give and take in the market has become a fashion. To build upon your own set of whims and to mould it in the realms of reality is when you end up in a face-off with the term 'loan'. Having had a brief with the term, when you end up in a personal investing situation, you will come across two major loan categories — secured loan and unsecured loan. Before considering your best option, let us further draw out secured loan meaning and derive its uses and specifications.

What is a secured loan?

A credit taken against the security of your assets is a secured loan. For instance, one secured loan example is if you opt for the loan while purchasing a house or a car, the deed of the purchase made will be in the lender's name until the payment in full is made by the end of the loan duration. Furthermore, your other assets like a stock, bond, jewellery, or shared equity can also be used back up for your loan and will be held by the lender as a guarantee/rebate in case of any default on payment. 

A secured loan is a credible way of borrowing an enormous sum as the lender can easily give you the required amount in need of the hour with your promise of paying him back on time. With the security blanket of collateral, the borrowing limit of the amount is greater and made available at lower interest rates which are comparatively high in unsecured loans. At the same time, the stress of paying the lump sum amount is taken off your shoulders. With the rising demands of meeting the corners of a certain lifestyle in the current market, secured loans become a great deal of opportunity to meet your current requirement swiftly and without delay.

Some known advantages of Secured Loans are:

• Lower Rates
• Higher Borrowing Limits
• Longer Repayment Terms

Types of secured loans

Home loan/Mortgage

As the name suggests, a secured loan for a home provides you with the immediate financial aid needed to purchase or build your whimsical little palace. In this case, you can immediately apply and are needed to pay approximately 20% of the whole value upfront to the lender, with the rest of the amount fixed over some time. Keep in mind the percentage of the amount needed to pay upfront may vary from one lender to another, similar to the interest rates. In this case, the property purchased is the collateral in itself, and the lease of the same will be finally released in your name after the entire payment has been made to the lender.

Business Loan

Although the option to opt for an unsecured loan is also available in this case, the secured loan is considered a preferred approach. In case of any heavy equipment or assets needed for your business, it becomes your added equity in the overall business. However, the added security needed in this case is to sign a personal guarantee with the loan taken and equipment held as collateral. It simply means that if the business defaults or faces any cash flow challenges, you are personally liable to bear the expenses of the loan and can be sued in case of default.

Gold Loans

India puts Gold on a pedestal of prestige and a premium acquisition. In certain cases, Gold possessions such as coins, biscuits, and jewellery can be deposited as collateral to lend a certain percentage of the value of Gold given. This helps in quick transactions without actually having to sell your Gold. The amount can be paid over the decided duration. In case of any default, Gold is then considered property of the lender.

Loan against Shares and Mutual Funds

While planning an investment for added income in the market, Mutual funds are considered one of the most risk-free tools to put your money in. Safe and secure, Mutual funds can also be considered as assets while opting for a secured loan with a credible 60-70% value of that mutual fund being made available while taking the loan.

When it comes to your shares in the market, most of the leading financial giants in the market assess the total value of your investment in the shares purchased. A certain percentage of that value is credited for your loan, keeping in mind the bulls and bears of the market.

Auto Loan

This is a loan taken against the purchase of any automobile. On the off chance that you don't pay the due payment portions on schedule and fail to reimburse the credit, you may lose your vehicle. Safety net providers will offer it to recuperate the credit sum.

Secured Vs Unsecured loans

Taking a quick diversion from secured loans, their benefits and their kinds, let's also briefly understand the stature of unsecured loans and what differentiates it from the former option. Unsecured loans are funds released by the lender purely based on creditworthiness and your word to pay the entire sum back — no security calls for more stringent measures to ensure timely repayment and keep a check on any defaults. A bank, therefore, has to charge a higher rate of interest on these payments given against a signature, and the credit value is lesser than a secured loan's value.

These loans are best suited for personal, educational, or short-term value acquisition. The important thing to note in the case of unsecured loans is that since the bank gives you an allowance with no collateral requirement, the charges are very high to keep at par with the risk taken by the bank as your lender.

How to Plan for a Secured Loan in India?

The market has numerous options and types of secured loans, making it an easier yet thoughtful decision before moving ahead. 

Here are the factors to consider before you plan a loan for yourself:

• Amount of funds needed
• Pay-off plan and tenure
• Collaterals are available at your disposal and more.

Similarly, what to look for in your loan includes: 

• The features and benefits of your secured loan
• Its interest rates
• The percentage of receivable value against your Gold, share, or mutual fund, etc.

As attractive a tool it is to invest in, make sure to plan your requirements and only go for it because you 'need to' and not because you 'can'. For instance, in some cases, it is a better plan to liquidate your mutual fund or share and use that amount instead of putting it up against a lowered value at loan. If your asset's value is much higher than the required loan value, it is best to not use it as collateral.

Lastly, in the current trend, there is a heavy demand for the loan, but so is the supply. Make sure to compare the features like processing fee, prepayment penalties, late fee charges, etc., of your secured loan against all the banks and lending sources and make an informed and well-balanced loan deal.

FAQs
✅ What are the documents needed for my secured loan?

Documents needed:

• ID Proof
• Age Proof
• Income Proof
• Original Asset documents
• Bank statements of the previous six months
• Guarantor (optional)

✅ What is the default penalty, and how can I avoid it?

In most cases, after missing the defined timeline of paying the premium over three times, the asset placed in custody gets open for sale by the lender to recover the due value of his insured sum. 

✅ What is the criteria of eligibility to apply for a secured loan?

Eligibility criteria to apply:

• You need to be 18+
• You must be a resident of India
• Most financial firms put a limit of an annual income of up to INR 3 lakhs
• For business loans, the business must be running and show a profit for three consecutive years.
• The assets must be of a greater value than the applied amount.

✅ What are the best interest rates available in the market?

For home loans in the current market, the rates range from 8.75%-9.5%; car loans are starting from 9.75%, and so on. The most opted-for banks by the customers for secured loans are SBI, HDFC, and Axis Bank, with their competitive interest rates and other facilities.