Secured Loan Explained: How it works and other key details

A loan is a financial tool that allows individuals or businesses to borrow money for various needs, such as buying a home, funding education, or expanding a business. Instead of paying the full amount upfront, borrowers repay the loan over time in fixed installments, usually with interest.

While loans provide financial flexibility, it’s important to understand the terms, interest rates, and repayment schedules to make informed decisions.

Loans are mainly classified into two types: secured loans and unsecured loans. The key difference is whether or not collateral is required.

What is a Secured Loan?

Secured loans are loans that require collateral – an asset like property, vehicles, or cash – as a condition for borrowing.

Lenders often ask for collateral when the loan amount is large or when the borrower’s credit score isn’t strong enough for an unsecured loan. Because the lender has security, secured loans generally offer lower interest rates. However, certain types, like bad credit personal loans, may still have higher interest rates.

Access to a loans has become convenient with the rise of digital lending platforms. For instance, you can explore multiple loan offers from eight lenders through the Moneycontrol app and website. These personal loans start at an interest rate as low as 10.5% per annum. Moneycontrol offers loans up to Rs 50 lakhs in a completely digital process.

Features of Secured Loans

• Secured loans are backed by collateral, which can be physical (property, vehicles) or liquid (cash).


• Both personal and business loans can be secured; business loans may also require a personal guarantee.


• Banks, credit unions and online lenders offer secured loans.


• Interest rates, fees and terms vary depending on the lender and the borrower’s profile.

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Types of Secured Loans

• Mortgage Loans (Home Loans) - Used to buy or renovate property, with the home as collateral.


• Vehicle Loans - Loans for cars, bikes, or commercial vehicles, where the vehicle serves as security.


• Loan Against Property - Borrowing money by pledging real estate for various financial needs.


• Gold Loans - Short-term loans where gold jewelry or coins are used as collateral.


• Secured Credit Cards - Credit cards backed by a fixed deposit to help build or improve credit scores.


• Secured Personal Loans - Loans taken for personal needs, secured by assets like jewelry, vehicles, or investments.


• Secured Business Loans - Financing for businesses where collateral can include machinery, inventory, or property.


• Share-Secured or Savings-Secured Loans - Loans backed by a savings account or fixed deposit.


• Pawnshop Loans - Small loans where valuables like jewellery or electronics are pledged.


• Life Insurance Loans - Borrowing against the cash value of a life insurance policy.


• Secured Lines of Credit - A revolving credit facility backed by assets like property or savings.

How to Apply For a Secured Loan

1. Visit the bank or lender’s branch or website/app.


2. Fill out the loan application form.


3. Submit KYC documents (Aadhaar, PAN, etc.).


4. Provide income proof to validate repayment ability.


5. Submit any additional documents required.


6. Upon verification, loan disbursal happens quickly if everything is in order.

Secured Loans: Eligibility Criteria

To qualify for a secured loan, applicants must:

• Be 18 years or older and a resident of India.


• Be salaried, self-employed, business owners, NRIs, NROs, NREs, farmers, or HUFs.


• Have a minimum annual income of ₹3 lakh (varies by lender).


• Own assets matching or exceeding the loan amount.


• Have a decent credit score (higher scores improve approval chances).


• If applying for a business loan, the company must be profitable for at least three years.

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Documents Required For a Secured Loan

The required paperwork varies based on the loan type:

• Mortgage Loan: ID proof, income proof, property documents and bank statements.


• Car Loan: ID proof, age proof, income proof and bank statements.


• Home Loan: ID proof, address proof, bank statements and guarantor details (if applicable).


• Business Loan: Company profile, promoter details, audited balance sheets and ID/address proof.

Secured Loans: Pros & Cons

Benefits:

• Lower Interest Rates - Since your asset secures the loan, banks charge less interest.


• Higher Loan Amounts - You can borrow more, as the risk for banks is lower.


• Better Terms - Faster approval, lower fees and easier processing.


• Flexible Repayment - Choose shorter or longer EMIs, prepay, or extend as needed.


• Low Credit Score Requirement - Collateral makes approval easier, even with a low credit score.


• Tax Benefits - Some secured loans (like home loans) offer tax deductions.


• Lower Income Requirement - Banks are less strict about your income level.

Disadvantages:

• Risk of Losing Your Asset - If you can’t repay, the bank can take your house, car, or other collateral.


• Repossession - Missing payments could result in losing both the asset and the money already paid.


• More Paperwork - Requires many documents, including proof of ownership.


• Full Ownership Needed - The asset must be fully owned by you, with no ongoing loans.


• Higher Overall Cost - Longer loan terms mean paying more in interest over time.


• Asset Value Must Match Loan - If the asset is worth less than the loan, you may still owe money.


• Debt Burden - Even if the bank seizes your asset, you may still have to pay the remaining loan.


• Credit Score Impact - Defaulting can badly affect your credit score.

To conclude, secured loans come with lower interest rates compared to unsecured loans. It could be a suitable option if you have assets to pledge against the loan. It’s advisable to compare secured loans rates from multiple lenders to choose the best offer.

ALSO READ: How to Compare Personal Loan Offers?

Through the online lending platform of Moneycontrol you can access instant personal loan offers for up to Rs 50 lakhs from eight lenders. The interest rates start at 10.5% per annum. The application process can be completed in a 100% digital mode.