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About Secured Loans

Secured loans are loans under which a borrower pledges an asset or property as security against loan repayment. The lender has the advantage of the collateral if the borrower fails to repay the loan in the stipulated time. Gold loans, loan against property, auto loans, home loans etc., are some of the examples of secured loans.

Secured Loans
Secured Loans

Purpose of Secured loans

Secured loans are generally taken for many reasons -

  • When the borrower needs a large amount of money against pledging assets and properties
  • As an extension of an earlier loan which relieves the borrower of financial risk and gives the lender security against loan repayment
  • As a measure of debt consolidation with a view to improving the credit score
  • As a choice over unsecured loan because of better terms

Features of the Secured Loans

Specific features of secured loans differ from one lender to another. They may also differ depending on the purpose of the loan. However, the general features of any secured loan are -

  • The lender gets security against non-repayment of the loan
  • Lenders are willing to offer lower interest rates since their principal is secured
  • Secured loans are usually taken for large sums
  • It is convenient to offer the capital asset being purchased as collateral against loan - for example offering the same car that is purchased with the loan amount

Types of Secured Loans in India

The following types of secured loans are available in India -

  • Mortgage (Housing) loans - These are loans against property - either already owned by the borrower or for purchase of a new property. In these types of loans, the property under question is used as collateral.
  • Vehicle loans - Loans taken to purchase a new or used vehicle are called vehicle loans
  • Financial Instrument Loans - Loans taken by providing a financial instrument such as a fixed deposit or insurance policy as collateral are called financial instrument loans.
  • Title Loans - Under this type of loan, the title under a property is temporarily transferred to the lender for the tenure of the loan. When the loan is fully repaid the property - house, land, or vehicle - reverts to the borrower.
  • Non-recourse loan - Under this type of loan, the property offered as collateral is the only recourse available to the lender against the borrower.
  • Pawn-broker loan - This type of loan is offered by individuals against property such as jewelry for short periods of 6 months to a few years. These are unofficial loans usually taken with little or no document

Eligibility Criteria for Secured Loans

While different institutions have different criteria, the following is a general guideline for eligibility for secured loans -

  • While 18 is the appropriate age for contracting, most banks require the applicant to be 21 years or more.
  • In order to take a loan in India, the applicant must be an Indian resident.
  • Most banks also offer loans to NRIs, NREs, and NROs
  • There is usually a requirement for a certain minimum amount of annual income - usually Rs. 3 lakhs – however, this varies from lender to lender.
  • Applicants can be salaried, self-employed, professionals, or business institutions.
  • Loans may also be granted to HUFs and farmers
  • Applicants must possess assets of sufficient value to match the loan amount. This asset will then be offered as collateral against loan.

Documents Required for Secured Loans

In general the following documents are required to take a loan -

  • PAN card
  • Proof of income: Salary slips for the most recent 3 months
  • Proof of residence: Rental agreement, Passport, Landline bill, Post-paid mobile bill, Bank statement
  • Proof of identity: Driver’s license, Aadhaar, Voter ID, Passport
  • Proof of age: Driver’s license, PAN card, Passport
  • Bank statements for the last 6 months
  • Proof of employment: Offer letter, Form 16, Relieving letter

This list is indicative and may vary from time to time, lender to lender, and loan to loan.

Benefits of Taking Secured Loans

There are many benefits to taking a secured loan. Some of them include -

Lower Interest Rates -

Secured loans carry lower interest simply because the loan is secured against the collateral supplied. In case the borrower fails to repay within the stipulated time, the loan is foreclosed and the balance is recovered from sale of the asset offered as collateral. For the borrower this means lower EMI and lesser financial risk. Of course if your asset does not cover the balance then the lender will hit upon your personal finances but this rarely occurs since most lenders only offer a percentage of the asset value as loan.

Larger amount of loan

Once again, because of the security offered by the collateral, such as car or home, it becomes possible to take larger amount of loan. Since the lender’s liability is covered by the collateral, lenders do not usually scrimp on loan amount. This is of course subject to certain conditions such as minimum term or maximum age of the borrower. These terms are in place to ensure that the borrower will be able to repay the loan within the stipulated time.

Better and more flexible terms

Processing is faster for secured loans since both the borrower and the lender know that the loan is secured by collateral. This means that banks and other lenders do not dig too deep into the borrower’s creditworthiness. There is however certain criteria to ensure that the borrower will repay the loan amount as well as interest. Most banks also have lower penalties for foreclosure, extension of tenure, and failure to meet EMI dates. Some lenders insist on a minimum term before they allow you to close your loan prematurely. While these terms obviously offer better security to the lender, it also means lower risk and better capital management for the borrower.

Can be used for debt consolidation

Secured loans are ideal in situations where you have taken a number of short-term loans for various purposes and have several EMIs going out of your pocket. Having a large number of outstanding loans can reduce your CIBIL score - credit score - and prevent you from taking further loans. In such situations, keeping a valuable asset as collateral and taking out a large secured loan to pay off all the other loans can not only improve your credit score but also reduce the EMI besides making it easier to pay back a single lender. Also improving your CIBIL score can help you get new loans in future.

Of course on the flip side, taking a secured loan means handing over your asset to the lender who will repossess it in the event you are unable to meet the terms. In this sense, secured loans may be viewed as risky. Secured loans also involve more paper work since you have to write over the collateral as well as provide all the required loan documents. And finally coming up with an asset equal to or exceeding the amount of loan may be a challenge in the first place.

Interest rates and charges for Secured Loans

Interest on secured loans is considerably lower than that on unsecured loans. However different lenders such as banks and NBFCs offer different rates of interest. Interest rates may also vary depending on the amount of loan, purpose, and the asset offered as collateral.

How to apply for Secured Loan

Application process varies from one institution to another. However the general steps you need to take if you want a secured loan are -

  • Visit the website or office of the concerned bank or NBFC
  • Fill in the application form - you can find most application form on the website of the institution.
  • Submit your KYC documents such as Aadhaar and PAN card
  • Submit the required proof of income.
  • Submit any other documents required

If everything is in order, your loan will be disbursed within a short time.

Top Banks providing Secured Loan in India

With the large number of options available, it can be a bit daunting to choose the right lender. Here is a list of top 5 banks in India offering home and car loans using the property as collateral along with rates of interest.

BankHome Loan Interest Rates Car Loan Interest Rates
State Bank of India/SBI8.75% - 9.35%9.65% onwards
HDFC8.80% - 9.70%11.50% – 13.75%
Axis Bank8.85% - 9.10%9.5% to 15%
PNB Housing Finance9.00% - 13.00%9.40% to 9.75
ICICI Bank9.10% - 9.30%10.75% – 12.75%

It must be understood that these rates are indicative and subject to change at any time. Please contact the concerned bank for current rates as well as terms of loan and other information.

Secured Loans FAQs

1. Can I get a secured loan with low credit rating?

Whether or not you can get a secured loan with low credit rating depends on the lender, the terms of the loan and some other factors. However since the lender has your asset as collateral, it is possible that the loan may be approved even with low credit rating.

2. Will I need to make arrangements for a guarantor to get my secured loan approved?

Terms of loan vary from one lender to another. While some banks and NBFCs insist on a guarantor, others will not do so if other conditions are favorable.

3. What should be the value of the asset offered as collateral?

Most banks offer 70% to 90% value of collateral as loan. This can vary depending on other eligibility factors as well as the specific terms under the loan.

4. How long will I have to pay EMI on my secured loan?

You can choose the term of your loan however approval and amount of EMI will depend on your income and certain other factors.

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