When it comes to borrowing money, understanding the type of loan you choose is necessary. One loan option which is preferred by many is a secured loan. But what exactly is a secured loan, how does it work and why should you choose it over other options? Let’s find out.
What is a Secured Loan?
In simple terms, the secured loan definition revolves around the concept of “security” provided in the form of collateral. It is a type of loan where the borrower pledges an asset, known as collateral, to secure the loan. The collateral can be anything – property, vehicle, savings account, or any other valuable asset. If the borrower fails to repay the loan, the lender has the legal right to seize the collateral to recover the money.
How do Secured Loans Work?
When you apply for a secured loan, you will need to offer something valuable as collateral. The collateral can be your home, car, or even financial instruments like mutual funds, stocks, or bonds. This acts as a guarantee for the lender who will then assess the value of the collateral to ensure it is sufficient to cover the loan amount. The lenders also evaluate your financial details, such as your income and credit score, to decide the loan terms and interest rate.
Once the loan is approved, you will receive the loan amount. You repay that in Equated Monthly Installments (EMIs) over a fixed period. During the repayment period, the lender holds legal rights to it. You cannot sell or transfer the asset until the loan is fully repaid. Once you repay the entire loan amount, including interest, the asset is fully yours again.
However, if you fail to repay, the lender can legally seize your collateral, sell it, and recover their money. This is why it is crucial to assess your ability to meet the repayment terms before taking a secured loan.
Features of Secured Loans
The following are the features of secured loans:
- As mentioned earlier, secured loans are given against the title of ownership of assets, which will be used as collateral (like vehicles, assets, and property).
- These loans have lower interest rates as compared to unsecured loans.
- These loans have more flexible repayment options than regular loans.
- Option of fixed rate and variable interest rate.
- Secured loans can be customised as per specific needs.
- Even non-salaried individuals can avail secured loans.
- A guarantor is not required for these types of loans.
Types of Secured Loans
The following are the types of secured loans:
- Home loans
- Car loans
- Business loans
- Mortgage Loans
- Loan against insurance
- Loan against securities
- Gold Loan
- Bad credit loans
- Non-recourse loans
Advantages of Secured Loans
The following are the advantages of secured loans:
- One of the secured loan benefits is that the collateral reduces the lender’s risk which allows them to offer lower interest rates.
- Secured loans are a great option for big loans because they allow you to borrow larger amounts. The value of your collateral often determines how much you can borrow, so if you are pledging a high-value asset like a house or a car, you are likely to get a bigger loan.
- Secured loans often come with repayment terms that can stretch over several years.
Disadvantages of Secured Loans
Every coin has two sides. Similarly, despite their benefits, secured loans also have a few disadvantages:
- If you are not able to pay back a secured loan, the lender can take the asset you pledged.
- Getting a secured loan is time-consuming when it comes to the valuation of your asset and documentation.
- A secured loan is not for everyone. If you do not have a house, car, or any other high-value asset in your name, you might not be eligible for a secured loan.
Who Should Opt for a Secured Loan?
If you are confident to repay the loan on time, want lower interest rates and longer repayment terms, you can opt for a secured loan. However, if you do not have a strong collateral or face uncertain financial stability, an unsecured loan might be a better option.
Conclusion
There is no doubt that a secured loan has a lot of benefits if you have that strong backing of a collateral. If you are looking for such a loan, check out CASHe. Download the CASHe app and get instant personal loans of up to ₹3 lakhs with competitive interest rates and flexible repayment periods.
