A loan against collateral or Secured loan is a type of loan where the borrower takes debt against collateral. In other words, the borrower pledges a valuable asset as a security to the financer. This type of loan is called a Secured loan because it provides security to the financer for their money.
In most cases the borrower use secured loans to finance a commodity like a house, vehicle, etc., here the borrower pledges the purchased commodity as collateral. Alternatively, the borrower can take a loan by pledging their stocks, property, jewelry, fixed deposits, etc.
Why Secured Loan?
From Borrowers perspective Secured Loan offers greater flexibility, longer repayment tenure, and higher loan amount than an Unsecured Loan.
For lenders, it offers more security and lowers the risk of default by borrowers. In case the borrower fails to pay the loan, the lender can recover their money by selling the asset pledged.
Types of Secured Loan
- Mortgage loan
- Home loan
- Vehicle loan
- Secured Business Loan
Eligibility Criteria for a secured loan
- Applicant must be an adult (above 18 years of age)
- Some Financers expect you to have an annual income greater than a prescribed amount. Although the income can come from business, regular salary, or non-salaried resources.
- Applicant must have an asset whose valuation matches or exceeds the loan
Pros and Cons of Secured Loan
- Lower Interest Rate than an unsecured loan.
- More Flexible repayment options.
- Can offer Longer repayment tenure.
- Faster Loan Approval
- Loans are Customizable to cater to specific needs.
- Can be availed by a non-salaried person.
- Offers Higher Loan amount than an unsecured loan
- A guarantor is not required
- Can be availed even at a low CIBIL score. Moreover, it improves the CIBIL score when the loan is fully paid.
- Lenders have more confidence and security for their money.
- Seizing of collateral in case of default in repayment of the loan.
- The money borrowed can only be used for a specific function as per the loan agreement.
- It involves Heavy Paper Work more complex than an unsecured loan.
- It expects that the applicant has full ownership of the collateral pledged.
- Longer repayment tenure also means a greater total amount in repayments
- Even after the bank seizes the collateral, any income you generate will go straight to the bank. More often than not, applicants keep paying only the interest and fines whereas the principal amount remains the same.
- Default on the repayment can heavily reduce your CIBIL Score.
Even with many advantages of a secured loan. It is always wise to plan your finances because defaulting on a secured loan is very brutal for your financial health.
How to compare Secured Loan?
Before making any purchase, a good rule of thumb is to compare what other options are available in the market. A secured loan is no exception to this rule, and hence it is important to compare every proposed offer against your assets. While making a comparison among secured loan look for the following factors:
- The type of collateral required to secure the loan.
- Minimum and Maximum loan amount.
- The interest rate for the loan
- Any additional fees charged by the lender, such as processing fees, prepayment penalties, etc.
- Credit Score and Income requirement of the loan.
- Proper analysis of the loan agreement and whether or not it suits your financial aspirations.
Secure or Unsecured, taking a loan is no joke and has many risks involved, so before taking any type of debt you must ask a few questions to yourself.
- Do I really need this debt, and what other options are available to me.
- How this debt will affect my life in the best and the worst-case scenario.
- How much loan I can afford and how little do I really need.
For more such updates, keep watching this space!