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Secured Loan – What it is and When to take it?

Secured Loan

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.

loan

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

Pros

  • 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.

Cons

  • 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?

compare 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!

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When and How to get a loan?

Loan

Short on cash? Whether it’s a trip you’ve been planning, a car you want, or just a sudden shortage of money there could be many reasons why a loan is your best option. In this article, we will discuss when the loan is right for you and how you can get financed.

Loan - What is it and How it works?

It is an agreement between the borrower and a lender, where the borrower borrows money from the lender. And the lender receives a legal document that ensures the repayment of the money borrowed. Both borrower and lender can be an organization or an individual.

Types of Loan

Types of loans

These can be classified into two types based on the security provided:

Secured Loan

In a Secured Loan, the borrower pledges security for the money that they are borrowing. Here, the securities are the assets that can be sold if the borrower defaults on the repayment of the loan. In this type of loan Lender have security for their money.

Unsecured Loan

Unsecured ones are riskier than Secured loans as per the lender’s perspective. These loans do not require collateral, however, the eligibility criteria are more strict in Unsecured than Secured Loan.

Further loans can also be categorized on the basis of their purpose. To list a few we have,

  • Education
  • Home
  • Personal
  • Car or Vehicle
  • Business

Different types of loans have a set of similar eligibility parameters along with other specific parameters according to the loan type. Also, every lender defines their eligibility criteria differently.

Types of Lender:

There are many financers in the market that provides loans. These financers can be categorized into:

  • Banks
  • NBFCs
  • Private Financers (Individuals or corporations)

Different finance offers different loan products i.e. different interest rates, tenure, collateral, etc.

Lenders

What financers look for while evaluating your application?

Before issuing any loan, every financer performs some eligibility checks on the borrower’s profile. In most cases financers are looking for profiles that have:

The interest rate is often based on the below features of a borrower’s profile.

CIBIL

Documents required

Loan application

For Salaried Applicants:

  • Application form with photograph
  • Identity and address proof
  • Last 6 months’ bank account statement
  • Latest Salary Slip
  • Form 16

For Self-Employed Applicants:

  • Application form with photograph
  • Identity and address proof
  • Last 6 months’ bank account statement
  • Proof of business
  • Business profile
  • Income Tax returns (self and business) for the last three years
  • Profit/loss statements and balance sheets of the last three years

When should you apply?

Before you apply for a loan, you should be aware of your financial situation. It is you who must pay back the amount later. Proper planning for your personal finances is necessary to ensure good financial health.

How to apply?

To apply for the loan, you can either go to the bank and talk to the bank officials or steer past all that and apply online. We will discuss the procedure in the following steps:

  1. Choose the lender you’d wish to borrow from that supported your research and check for your eligibility.
  2. To apply, you should visit their bank branch or go through their official website.
  3. Read the form carefully before signing in anything.
  4. Submit or upload all the necessary documents mentioned in the application form.
  5. Wait for the bank’s response, it can take from few minutes to few days. The bank will process your application and respond accordingly in a stipulated time.

It is always advisable to read all the documents carefully and discuss every clause thoroughly until nothing remains vague. Never take a loan unless you absolutely need it. Defaulting on the EMIs can lead to an unpleasant situation that is not good for your financial and mental well-being.

For more such updates, keep watching this space!