What Are Secured Loans?
Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren’t sufficient to qualify for an unsecured loan. Secured loans may allow borrowers to enjoy lower interest rates, as they present a lower risk to lenders. However, certain types of secured loans—including bad credit personal loans and short-term installment loans—can carry higher interest rates.
Understanding the Types of Secured Loans
Loans that are secured can be found in different types, each one made to fit particular money requirements and situations. One common type is the mortgage loan, where the property being financed acts as an assurance. Usually, this kind of loan is used for buying houses or real estate properties. Another well-known secured loan is the auto loan. In this type of lending, the security is provided by the vehicle that you are buying. For people who want to borrow money and have assets such as savings accounts or investment portfolios, they can choose a secured personal loan where their possessions act as collateral. Two more common choices for using assets as security are secured lines of credit and secured credit cards.
Additionally, the borrower must understand that the kind of secured loan they select might influence how the borrowing agreement is structured. For example, mortgage loans usually come with lengthier repayment periods and lesser interest rates in comparison to alternative kinds of secured loans. Conversely, secured credit cards might provide a greater degree of flexibility when it comes to credit caps and potential expenditures.
- Loan Purpose: Choose a secured loan type that aligns with your specific financial goals and borrowing needs.
- Repayment Terms: Evaluate the repayment period and interest rates associated with each type of secured loan to determine the most suitable option.
Features of Secured Loans
- Loans are given against the title of ownership of assets, which will be used as collateral (like homes, vehicles, assets, property).
- Lower interest rates as compared to unsecured loans, because the bank has a higher level of confidence in your ability to repay.
- More flexible repayment options than regular loans.
- Option of fixed rate and variable rate.
- Loan approval is faster.
- Customizable loans to cater to specific needs.
- These loans are available to non-salaried individuals.
- There is no need for a guarantor for these types of loans.
- Banks and lenders can repossess assets for which loans were taken.
- Improves CIBIL score once secured loan has been repaid in full. More favourable than unsecured loans.
How Do Secured Loans Work?
Debt products backed by an owned asset are known as secured loans. The assets you intend to use as collateral for a secured loan must be disclosed to the lender when you apply. A secured loan allows you to pledge an asset as collateral, such as your house, vehicle, or boat. The lender will put a lien on your until you repay the loan.
Lenders may seize and sell the collateral to make up for losses in the event of a loan default. The majority of secured loans are instalment loans, which means you get your entire loan amount all at once and have to pay it back over time in EMIs. Mortgage loans have 30-year repayment terms, while secured personal loans have shorter terms of one year.
Types of Secured Loans
Secured loans can be used for a number of different purposes. For example, if you’re borrowing money for personal uses, secured loan options can include:
- Vehicle loans
- Mortgage loans
- Share-secured or savings-secured Loans
- Secured credit cards
- Secured lines of credit
- Car title loans
- Pawnshop loans
- Life insurance loans
- Bad credit loans
As mentioned, vehicle loans and mortgage loans are secured by their respective assets. Share-secured or savings-secured loans work a little differently. These loans are secured by amounts you have saved in a savings account or certificate of deposit (CD) account at a credit union or bank. This type of secured loan can be useful for building credit if you’re unable to get approved for other types of loans or credit cards.
In the case of a secured credit card or line of credit, the collateral you offer may not be a physical asset. Instead, the credit card company or lender may ask for a cash deposit to hold as collateral. A secured credit card, for instance, may require a cash deposit of a few hundred dollars to open. This cash deposit then doubles as your credit limit.
Business Loans
Business loans can also be secured, though unsecured ones can be had. An equipment loan, for instance, is a type of secured business loan. Say you own a construction business and need to purchase a new dump truck. You could use an equipment loan, secured by the dump truck you plan to purchase, to pay for it. As long as you pay the loan on time, you wouldn’t be at risk of losing the equipment you purchased.
One thing to note about secured business loans is that you may also be required to sign a personal guarantee. This means that you agree to be personally liable for any debts taken out by your business if the business defaults on the loan. So if your business runs into cash flow issues, for example, you could be personally sued for a defaulted loan.
Car Title Loans and Pawnshop Loans
Other types of secured loans include car title loans and pawnshop loans. Car title loans allow you to borrow money using your car title as collateral. Pawnshop loans can use anything from tools to jewelry to video game consoles as collateral, depending on what you’re willing to pawn. These are generally short-term loans that allow you to borrow small amounts of money.
Life Insurance Loans
A life insurance loan lets you borrow money against a life insurance policy using its cash value as collateral. You could then repay the loan during your lifetime or allow the loan amount to be deducted from the death benefit paid to your beneficiaries when you pass away. This type of loan is available with permanent life insurance policies, such as variable or whole life insurance.
Bad Credit Loans
Bad credit personal loans are another category of secured loans. These are personal loans that are designed for people with poor credit history. Lenders can offer bad credit personal loans, but they may require some type of cash security, similar to share-secured loans, secured credit cards, and secured lines of credit. Note that a lower credit score can translate to a higher interest rate and/or fees with a bad credit secured loan.
Tips for Securing a Secured Loan
For a secured loan, you must think carefully and get ready to make sure that your application is approved and you receive good loan conditions. One important thing is to keep up a good credit score because lenders frequently look at the credit history when they evaluate applications for loans. Making sure that information in your credit report is correct by checking it often can assist in enhancing eligibility for a secured loan.
Furthermore, it’s very important to accurately determine the value of the collateral being offered. This helps make sure the asset matches with loan amount and conditions. Getting professional appraisals or assessments can give a fair value for the asset and prevent over- or under-evaluation. Also, giving full and correct documents when applying for a loan is necessary to show your financial steadiness and ability to repay money to the lender.
- Terms and Conditions: Thoroughly review the loan agreement terms and conditions to understand your rights and obligations as a borrower.
- Loan Repayment Plan: Develop a realistic repayment plan based on your financial situation to ensure timely repayment of the loan amount.
Eligibility Criteria
You must meet the following requirements to be eligible for a secured loan:
- Applicants must have reached the age of 18 years or older.
- Applicant must be a resident of India.
- Secured loans can be availed by NRIs, NROs, NREs, as well as self-employed, professionals, business organisations. Farmers and HUFs can also apply for this type of loan.
- Most banks and lenders require the applicant to have a minimum annual income of Rs.3 lakh per annum.
- Income can be generated from regular salary, non-salaried income and business income.
- For loans based on business income, the business must have been running and generating a profit for the last 3 years.
- Applicant must have assets, whose value must match or exceed value of loan required.
Where to Find Secured Loans
Secured loans can be found at banks, credit unions, or online lenders. When comparing secured loans, there are some important things to keep in mind. For example, you’ll want to look at:
- What type of collateral is required to secure the loan
- The interest rate and annual percentage rate (APR) for the loan
- Whether the loan interest rate is fixed or variable
- Any fees the lender charges, such as origination fees or prepayment penalties
- Minimum and maximum loan amounts
- Credit score and income requirements for the loan
Comparing loan rates and terms with multiple lenders can give you an idea of how much a secured loan is likely to cost. You can also compare them using an online secured loan calculator to estimate your monthly payments and the total amount of interest paid.
In the case of a secured business loan, you want to be sure to check the requirements for a personal guarantee. While this practice is fairly common with both secured and unsecured business loans, you don’t want to be taken by surprise. And with a secured credit card, it’s helpful to ask the credit card company if there’s any way down the line to have the account converted to an unsecured card and your security deposit refunded to you.
Understand the Difference Between Secured and Unsecured Loan
Secured and unsecured loans are totally different loan categories and differ in several key . Let’s understand the difference between the two by the following table: Secured Loans vs Unsecured Loans.
| Basis | Secured Loan | Unsecured Loan |
| Collateral | Required | Not required |
| Borrowing Limit | Depends on the value of the asset given as collateral | Depends on the individual’s income and repayment ability |
| Interest Rates | Generally Lower | Higher than a secured loan |
| Repayment Tenure | Generally given for longer tenure. | Lower tenure can be between 12 months to 60 months. |
| Examples | Home loan, Car loan, Loan against mutual funds, etc. | Personal loans, student loans, lines of credit, etc. |
Documents Required to Apply for Secured Loans
You will, of course, need to submit a bunch of documents to the lender or bank, so that they can establish your identity, address, and other details. Documents you will require for different kinds of secured loans are:
Mortgage loan:
- Proof of identity – This should be an official document which contains your name and photograph. Could be either your driving licence, passport, voter’s ID, PAN card, Employee ID (if the company is registered), etc.
- Proof of age – Should be a verifiable document that determines your age, such as a birth certificate, passport, voter’s ID, etc.
- Proof of income – This should be an official / certified document which contains the details of your income and tax paid (TDS). Could be either your salary slips for the past 3 months, or Form 16 duly filled in and attached to a salary certificate.
- Proof of residence – This should also be a certified document that verifies your residential address in the eyes of the law. Could be either your phone / internet bill, rental agreement, bank account statement, etc.
- Original property documents of the property that is being pledged as collateral against the loan.
- Bank statements for the last 6 months.
- Guarantor (optional).
- Copy of lease agreement for LRD (Lease Rental Discounting).
Car loan:
- Proof of age – Should be a verifiable document that determines your age, such as a birth certificate, passport, voter’s ID, etc.
- Duly filled in application form. This is available from the bank itself.
- Proof of identity – This should be an official document which contains your name and photograph. Could be either your driving license, passport, voter’s ID, PAN card, Employee ID (if the company is registered), etc.
- Passport sized and stamp sized photographs.
- Proof of income – An official / certified document which contains the details of your income and tax paid (TDS). Could be either your salary slips for the past 3 months, or Form 16 duly filled in and attached to a salary certificate.
- Bank statements for the last 6 months.
- Verified proof of signature. The lender will require many specimen signatures, verifiable against certified documents that already contain your signature.
- Proof of residence – A certified document that verifies your residential address in the eyes of the law. Could be either your phone / internet bill, rental agreement, bank account statement.
Home loan:
- Proof of residence – A certified document that verifies your residential address in the eyes of the law. Could be either your phone / internet bill, rental agreement, bank account statement.
- Proof of identity – This should be an official document which contains your name and photograph. Could be either your driving license, passport, voter’s ID, PAN card, Employee ID (if the company is registered), etc.
- Bank statements for the last 6 months.
- Guarantor (optional).
Business loan:
- Company profile and product range – a description of your company, the products or services it exchanges for money, its managers and functions.
- Promoter profile.
- Audited balance sheets for the last 3 years.
- Proof of residence – A certified document that verifies your residential address in the eyes of the law. Could be either your phone / internet bill, rental agreement, bank account statement.
- Proof of identity – This should be an official document which contains your name and photograph. Could be either your driving license, passport, voter’s ID, PAN card, Employee ID (if the company is registered), etc.
How to Apply for a Secured Loan
Depending on the lending organisation, the application procedure may vary if you’re interested in applying for a secured loan. However, the following are the standard steps to apply for a secured loan:
- Visit the applicable bank’s or NBFC’s (Non-Banking Financial Company) physical location or website.
- Fill out the application, which is frequently accessible online on the institution’s website.
- Aadhaar and PAN cards are two examples of KYC (Know Your Customer) documentation that should be provided.
- Provide the required income documentation to back up your loan application.
- Send in any extra paperwork that the institution might need for your particular loan application.
- The loan will be disbursed quite soon, provided that all of your paperwork is in order.
Benefits of Secured Loans
Secured loans have many benefits that don’t apply for other types of loans. Secured loans can get you:
- Lower interest rates because the bank can rely on your desire to keep your collateral. Banks will lend with lower interest rates if they know their investment in you is protected. This of course means easier payments and a lower eventual hit to your personal finances.
- Larger loan amounts are sanctioned, as the bank’s liability and risk is substantially reduced. The bank will approve loan amounts that are as close to the value of your collateral asset as possible, and not make room for their potential loss.
- Better terms and conditions from the bank. Easier and cheaper processing (sometimes free), faster documentation and approval, and overall friendlier terms that don’t leave you in the lurch in case something goes awry.
- Flexible repayment terms, mean that you don’t have to worry about fines and charges on settlement payments, pre-closing your loan, making one big payment that greatly reduces your capital (if you’ve suddenly come into some money), or if you want to close your loan early or even if you want to extend your loan tenure. Some banks and lenders don’t allow you to close your loan early, but with secured loans, this is possible.
- Flexible repayment tenure, customizable to suit your ability to repay. You can choose to repay your loan faster, with chunkier EMIs for a shorter period, or choose to pay smaller amounts over a longer period. The choice is yours, for as long as your collateral asset is yours.
- Can be availed by those who have a bad credit history or CIBIL score – as both these indicators are basically representative of your ability to repay your loan. When you add a collateral asset into the equation, the need for the bank to know whether you can or can’t pay back your loan becomes irrelevant. The reason they need CIBIL and credit history information is to assess their own level of risk, but with an asset on the line, they undertake minimal risk.
- Interest is tax deductible, thus saving you more money that would otherwise be lost to taxation.
- Minimum income required is far lesser than that for Unsecured Loans, as this is also an indicator of your ability to repay. Your ability to repay is a factor that becomes moot, as you have already pretty much paid them by pledging an asset as collateral.
Disadvantages of Secured Loans
Along with the advantages that secured loans bring, there are also many disadvantages, like:
- Collateral seizing – The bank, while it approves a higher loan amount and a lower rate of interest, will not hesitate to seize all assets you have pledged as collateral. You must be as ready to give up the pledged asset as you are to take the loan. You must be ready to lose the roof over your head, the car in which you travel and the assets that earn your keep.
- Repossession – If you’re purchasing, say, a vehicle with a secured loan, you will be placing the vehicle as collateral against the possibility of your defaulting on the loan. This means that if you miss a payment or default in any way, the bank will take back your new vehicle and all EMIs that you’ve paid thus far will be considered null and void. You will lose all the money you’ve paid towards your new vehicle (plus interest), and the vehicle itself, leaving you totally stranded and completely broke. Let’s face it, if you had the funds, you would’ve repaid your loan.
- Heavy paperwork – Secured loans require a lot of paperwork, as you will have to provide the regular documents required (identity, age and address proof) along with documents that relate to the ownership of your asset. You will also be required to affix a metric ton of specimen signatures to a series of documents, and if even one of these signatures does not match the others, you will have to go through the entire arduous process again.
- Full ownership of collateral asset – If you wish to pledge an asset against a loan, you will have to be the full owner of that asset. The asset will have to be cleared of all EMIs and partnership agreements and will have to be solely owned by the person who is applying for the loan.
- Longer time period = greater total cost – A longer time to pay off the loan allows for more potential hiccups in your general rate of income, even the slightest dip in which could affect your repayment schedule. And if you miss an EMI payment, the bank will levy heavy fines and penalties which will compound and result in you losing your asset. A longer repayment schedule also means a larger eventual total cost, despite smaller monthly payments.
- Value of asset must match or exceed loan amount – the loan you desire must be recoverable by the sale of the asset you are planning on pledging. If the bank cannot realize its loss through the sale of the collateral, it will come after you with a legal document called a deficiency judgement, which will bind you to fulfil your liability.
- Living in debt – if you are unable to clear the loan even after the bank has seized your assets, you will be doomed to a life where any income you generate will go straight to the bank. More often than not, you will be paying off interest charges and penalty charges and the principal amount will remain more or less the same. Can you imagine a life where the bank has taken the roof over your head and you’re still paying them off?
- CIBIL score – you CIBIL score will suffer greatly if you default on a secured loan repayment. If the bank has to seize your house and other assets, your score and rating could go to a place from where it is very difficult to recover.
Secured loans are a way to secure finance in times of dire need, but must be used very cautiously and not at all be taken lightly. The asset pledged as collateral must be considered as property of the bank in the mind of the borrower, until the loan is repaid in full. Banks will not hesitate or think twice before seizing a defaulter’s collateral, and almost seem like sharks circling a boat waiting for someone to fall off of it.
If you are confident and able to repay your loan on time, every time, the interest rates, repayment schedules, terms and conditions are unmatched by those of any unsecured loan.
Do I Have to Have a Relationship With a Bank to Get a Secured loan?
It depends on the type of secured loan. If you’re applying for a share-secured or savings-secured loan, you must have an account at the institution. But if you’re applying for a business loan, home mortgage, or auto loan, you may be able to apply even without an account. You may find better interest rates at an institution where you already have accounts.
Do Secured Loans Have Lower Interest Rates?
Most secured loans do have lower interest rates than unsecured loans. However, there are exceptions—pawn loans and bad credit loans can have very high interest rates, as can title loans. Read the fine print carefully before signing an agreement.
What Happens if I Default on my Secured Loan?
If you miss a payment or default on your secured loan, the lender can seize whatever you used as collateral. That item, whether it’s your car, house, or personal property, can then be sold to recoup the loan amount.
FAQs
1. What is a secured loan?
A secured loan is a type of loan that requires collateral, such as a house, car, or savings account, to be pledged as security for the loan.
2. What types of secured loans are available?
Common types of secured loans include mortgage loans, auto loans, secured personal loans, secured credit cards, and secured lines of credit. There are also specific loans like equipment loans for businesses, car title loans, pawnshop loans, and life insurance loans.
3. How do secured loans work?
When you take out a secured loan, you pledge an asset as collateral. If you default on the loan, the lender can seize and sell the collateral to recover their losses. Most secured loans are installment loans, meaning you repay the loan amount in regular EMIs over a set period.
4. What are the benefits of secured loans?
Secured loans typically offer lower interest rates, higher borrowing limits, flexible repayment terms, and easier approval for those with bad credit history. They also provide potential tax benefits and require lower minimum income levels compared to unsecured loans.
5. What are the disadvantages of secured loans?
The main risks include the possibility of losing your collateral if you default, extensive paperwork, the need for full ownership of the collateral, and the potential for a longer repayment period to result in higher total costs. Defaulting can also severely impact your credit score.
Conclusion
Secured loans are a valuable financial tool that can provide access to lower interest rates, higher borrowing limits, and more flexible repayment terms. They are backed by collateral, which reduces the lender’s risk and can lead to easier approval, even for those with less-than-perfect credit. However, they come with significant risks, including the potential loss of your collateral if you default on the loan.
Before applying for a secured loan, it’s crucial to understand the terms and conditions, assess your ability to repay, and be fully aware of the implications of pledging your assets as collateral. By carefully evaluating your financial situation and the specific loan requirements, you can make an informed decision that aligns with your financial goals and needs.