Secured loans allow borrowers to raise funds without selling their assets or compromising on crucial financial goals. These loans hold lower credit risk for lenders as they have the option to sell the pledged securities in the event of a payment default. The lower credit risk of secured loans, in turn, allows lenders to take a more relaxed approach to the credit score of loan applicants and also levy lower interest rate vis-à-vis unsecured loan options such as personal loan and credit card.
Here are four secured loan options that come without any restriction on end usage.
Loan against securities
Loan against securities (LAS) is offered against bonds, shares, ETFs, mutual funds, NSC, life insurance policies, KVPs, etc. The borrower would continue to receive interest, dividends, bonuses, etc. on the pledged securities, during the loan tenure. The loan amount depends on lender’s risk assessment of the securities pledged as collateral, subject to the cap on the LTV ratio assigned by the RBI for securities.
Loan against securities is usually offered in the form of an overdraft facility with a sanctioned credit limit. The borrower may choose to draw the entire sanctioned limit or a part of it as per his requirement. The interest component of loan against securities is charged on the amount drawn till its repayment. While the borrower needs to service the interest component every month, she is free to repay the principal amount as per her cash flow till the tenure of the overdraft facility, without incurring any prepayment charges. Thus, the repayment flexibility and absence of prepayment fee make loan against securities an excellent option for those having uneven cash flow.
On the flip side, any fall in the market value of pledged securities leading to the breach of the regulatory caps on LTV ratios would require the borrower to meet the LTV ratio requirements by either pledging more securities or by depositing funds with the lender.
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Gold loans are the quickest to be disbursed. Lenders usually tend to sanction gold loans within the same day of receiving the application. The repayment tenure of gold loans usually goes up to three years, with some lenders offering longer tenure of 4-5 years.
The loan amount depends on the valuation of pledged gold and the sanctioned LTV ratio, subject to the regulatory cap of gold LTV ratios given by the RBI.
A major advantage of availing gold loan is the repayment flexibility offered by the lenders. Apart from the usual EMI mode, many lenders offer bullet repayment or allow the borrower to just repay the interest amount upfront and settle the principal component at the end of the loan tenure. Such flexible repayment options can be especially beneficial for those requiring funds, but lack uniform cash flows to repay through EMIs.
Loan against property
Loan against property (LAP) is sanctioned against the pledge of residential, commercial and industrial properties. The loan amount can range from 50-70 percent of the property’s market value, arrived at by the lenders. The repayment tenure can be up to 15 years, with a few lenders offering longer tenure of up to 20 years.
This loan option is beneficial for those seeking bigger loan amount and/or longer loan tenure for smaller EMIs. On the flip side, LAP may not be suitable for those requiring quick funds, as their disbursals can take up to 2-3 weeks.
Top-up home loan
This loan option can only be availed by existing home loan borrowers with good repayment history. The loan amount is usually the difference between the originally sanctioned home loan amount and the outstanding loan amount. Similarly, the tenure of a top-up home loan cannot exceed the residual tenure of the original home loan, with most lenders further capping it at 15 years.
Top up home loan interest rate is usually the same or a notch higher than the interest rate levied on the underlying home loan. This makes top-up home loan one of the cheapest credit sources for existing home loan borrowers. Although the disbursal of top-up home loan applications usually takes between 1-2 weeks, some lenders have started offering pre-approved top-up home loans to existing home loan borrowers, with same day disbursal.
ConclusionFor existing home loan borrowers with long residual tenure, availing a top-up home loan would be the best choice due to the low interest cost. For the rest, the choice would be primarily depend on the availability of collateral. Those having multiple assets to pledge should make their decision on the basis of LTV ratio offered on available assets/securities, repayment tenure, processing fees, prepayment charges and interest rate of secured loan options.