What is a Secured Loan?
An agreement for a loan in which the borrower pledges security (such as their home or car) in exchange for quick cash is known as a secured loan. In the event the borrower defaults on the loan, they acknowledge that the lender may become the legitimate owner of the collateral.
A home mortgage loan is a relatively popular form of secured loan that uses real estate as collateral. Since the borrower risks losing his/her property as collateral if they do not make payments, the lender is assured of loan repayment on time.
Without collateral, it is impossible to obtain a secured loan, and one loses out on its main advantages. Such advantages include a more considerable loan amount and a longer payback time.
Due to their lesser risk to lenders, secured loans may provide cheaper interest rates to borrowers. Nevertheless, the interest rates on secured loans, such as short-term instalment and personal loans for those with bad credit may be higher.
What is the Purpose of Secured Loans?
The reasons why secured loans are usually availed of have been highlighted below:
- When the borrower requires a sizeable sum of money to be secured by pledged assets and properties
- As a continuation of a previous loan that removes the borrower’s financial risk and provides the lender with security against loan payback
- As a method of debt consolidation to raise credit score
- Due to superior terms, preferable to unsecured loans
Types of Secured Loans in India
The most well-known secured loans are probably mortgages and car loans. In addition to this, there are a variety of additional financing alternatives that could demand collateral. The most typical forms of secured loans are as follows:
- Loan Against Property or Mortgage Loans: Mortgages are typical loans used to fund real estate acquisition, including homes. These loans are secured by the property used as collateral. Hence, if the borrower defaults, the lender may foreclose.
- Car Loans: The car being financed serves as collateral for auto loans. Lenders keep the title to financed vehicles until the loan is fully repaid to safeguard their investment in the collateral.
- Home Loans: A home equity line of credit (HELOC) enables loan acquirers to use the equity in their home through a credit line similar to a credit card. Borrowers also pledge their house as collateral while obtaining a HELOC. They can promise the property that will be bought as security, which turns into secured debt.
- Business Loans: Business loans may be used to finance equipment purchases, employee salaries, or other corporate endeavours. There are several items that borrowers may use as collateral when applying for a business loan. A company loan might be secured by, among other things, inventory, equipment, land, or building.
Documents Required for Secured Loans
The lender or bank will want several papers from the borrower or person to verify the name, address, and other information. The person will need the following paperwork for various secured loans:
Mortgage Loans / Loan Against Property
- Proof of age – Age-verifying documentation should be shown as proof of age, such as a birth certificate, passport, Voters ID, etc.
- Proof of identity – An identification document with the name and a picture should be used as proof of identification. The certificate might be a Driver’s License, passport, Voters ID, PAN card, employee ID (if the business is registered), etc.
- A replica of the LRD leasing agreement (Lease Rental Discounting). An analysis of bank statements for six months.
- Original title records for any property used as security for the transaction.
- Proof of residence – This should also be a verified document that serves as legal proof of the residence address. It may be the phone or internet bill, their lease, the bank statement, etc.
- Proof of income – An authentic and certified document that provides information about the income and taxes paid should be used as proof of the income. It could be the three-month wage slips or a properly completed Form 16 connected to a salary certificate.
- Guarantor (not mandatory).
Home Loan
- Guarantor (not mandatory).
- An introspection of bank statements for six months.
- Proof of identity – This should be a formal document that includes the name and picture. It can be a Driver’s License, Passport, Voters ID, PAN card, employee ID (if the business is registered), etc.
- Proof of residence – a certified document that serves as legal proof of the home address. It can be the phone or internet bill, the lease, or the bank statement.
Car Loan
- Duly filled in the application form. It is accessible directly from the bank.
- Proof of age – A verified document proving the age should be presented, such as a birth certificate, Voters ID, passport, etc.
- Proof of income – A certified or legal document that includes information about the source of income and taxes paid (TDS). It can be the last three pay stubs or a properly completed Form 16 that is connected to a salary certificate.
- Passport-sized and stamp-sized photographs.
- An introspection of bank statements for six months.
- Proof of residence – a certified document that serves as legal proof of the home address. It can be the phone or internet bill, the lease, or the bank statement.
- Proof of identity – This should be a formal document that includes the name of the borrower and picture. It can be a Driver’s License, Passport, Voters ID, PAN card, employee ID (if the business is registered), etc.
- Verified proof of signature. The lender will ask for several sample signatures that will be compared with the official signature of the borrower.
Business Loans
- Company profile and product range – a description of the business, including its managers, functions, and the goods or services it sells for money.
- Proof of residence – A certified document that serves as legal proof of the home address. It can be the phone or internet bill, the lease, or the bank statement.
- Promoter profile.
- Proof of identity – It should be a legitimate document with the name and picture. It will include a Driver’s License, Passport, Voters ID, PAN card, employee ID (if the business is registered), etc.
- The latest three years worth of audited financial sheets.
What Types of Collateral are used for a Secured Loan?
The underlying goal of a secured loan is often connected to the kind of collateral needed to secure it. For example, mortgages, where the home loan is secured by the property being financed.
The lender and the loan amount are two additional variables that may affect whether collateral is suitable. Typical types of collateral include:
- Real estate, including houses, office buildings, commercial properties, and land equity
- Bank accounts, including checking, savings, certificate of deposit (CD), and money market accounts.
- Investments, including bonds, mutual funds, and equities
- Insurance plans, including life insurance
- Autos, trucks, SUVs, motorbikes, and boats, among others.
- Additional priceless items, such as precious metals, coins, and collectibles
- Business assets such as inventory, machinery, and other items
Advantages of Taking Secured Loans
The advantages of secured loans are highlighted below:
- Lower interest rates. Secured loans reduce the risk of loss of a lender with the help of collateral. Because of this, lenders frequently charge significantly lower interest rates on secured loans. Lenders could even compete to give the money if the borrower has a substantial salary, a good credit history, and significant assets. Mortgage providers frequently enable consumers to do this to look around for the best conditions.
- Larger loans. Secured loans have lower interest rates and substantial loan amounts. It is all about taking a chance. Lending is less risky if the lender has collateral on hand in the event of a default. In comparison, the highest credit card limit is paltry.
- Better terms. Secured loans have lengthier payback terms than unsecured equivalents. For instance, borrowers who take out home loans frequently have a 30-year repayment period. It makes sense to the lender since real estate often increases in value over time, increasing the value of the collateral as the loan is paid off.
- Build the credit. The next time a person needs to borrow money, they will be in a better condition to get the capital at lower interest rates if they repay a secured loan entirely and on time.
Eligibility Criteria for Secured Loans
To qualify for a secured loan, a person must fulfil the following conditions:
- The applicants have to be at least 18 years old
- The applicant must reside in India.
- The majority of banks and lenders demand that applicants have a minimum yearly income of Rs. 3 lakhs.
- Regular salaries, non-salaried income, and company revenue can all be used to produce money.
- To be eligible for loans based on business income, a company must have been operating profitably for the previous three years.
- The applicant’s assets must be worth at least as much as the requested loan.
How to apply for Secured Loan
Conventional banks, credit unions, auto dealerships, online lenders, and mortgage lenders frequently offer secured loans. To obtain a secured loan, follow these five steps:
- Analyse the credit score: The person should use a free internet service or a credit card to verify the credit supplier to verify the credit score before applying for any loan. Once the person is familiar with the score, they may use the data to prequalify for a loan or make efforts to raise it and the approval prospects.
- Review the budget: Reviewing the budget will help borrowers determine how much they can afford to pay each month if they are considering a secured loan. When taking out a new loan, it’s crucial to take into account previous debt obligations.
- Have an estimate of the potential collateral: The worth of the possible collateral, such as cash account balances, home equity, and other valuable assets, should be assessed when the persons are ready to look for a loan to determine how much they may borrow.
- Look around for the best loan: A borrower must start looking for different lenders after determining how much they can afford to borrow based on their credit score. Get additional information about the possibilities from the existing lender if one is thinking about getting a HELOC or home equity loan. If the borrowers want to apply for a secured personal loan, they should seek lenders who provide pre-qualification without a strict credit check.
- Apply formally by submitting a form: Submit a formal application after obtaining pre-qualification from a lender. Lenders who offer secured loans are likely to demand an appraisal to verify the value of the collateral before providing the loan, unlike the application procedure for an unsecured loan.
Top Banks in India providing Secured Loans
Since a borrower has several options in hand, it might be overwhelming to finalise the perfect lender. Here is a list of the top 5 Indian banks that offer car and home loans taking property as collateral, along with interest rates.
| Bank | Home Loan Interest Rates | Car Loan Interest Rates |
|---|---|---|
| HDFC | 8.80%-9.70% | 11.50%-13.75% |
| State Bank of India/SBI | 8.75%-9.35% | 9.65% onwards |
| Axis Bank | 8.85%-9.10% | 9.5% to 15% |
| PNB Housing Finance | 9.00%-13.00% | 9.40% to 9.75% |
| ICICI Bank | 9.10%-9.30% | 10.75%-12.75% |
Important Facts to remember for Secured Loans
Although secured loans are a fantastic method to fund significant expenditures, there are a few things to consider before applying for one.
- Collateral: A property or other item must be held as collateral to get a loan under a secured loan. The applicant will forfeit the property if they are unable to repay the loan.
- Documentation: Compared to an unsecured loan, this one demands more documentation. For some candidates, this may make the entire process complex.
- Loan with Collateral: The loan amount can only be as much as the value of the item or piece of property, being held as collateral. It establishes a loan borrowing cap for potential borrowers.
- Complete Ownership of Property: The applicant must be the only owner of the asset held as collateral.
- Floating Rate of Interest: When the interest rate is floating, the EMI payment amount changes. This is because an interest rate that is variable changes depending on the state of the market and RBI regulations. Since their EMI payments would fluctuate, this causes issues for loan applicants. The applicant’s spending and budget may be affected by this.
- Lender at an Advantage: Lenders are always in a better position when making secured loans. They have a slight advantage in the deal. Whether the borrower can afford to repay the loan is unimportant because the lender will still make a profit.
Conclusion
A secured loan is a significant investment in personal finances, so getting the best-secured loan for particular circumstances requires careful planning and preparation. A person also needs a clear repayment strategy.
The best course of action is to be aware of the risks involved, work with the best lender possible, and have a backup plan if the borrower has difficulties making the secured loan repayments.
Covering the crucial points will lead to a positive and better loan experience where they acquire the money while preserving ownership of the precious assets.
FAQs
Yes. Getting a secured loan is a good idea. The loan can be used up to the property’s worth. The borrowers receive cheap interest rates and have time to repay the loan. Additionally, candidates with weak credit histories might still easily qualify for the loan.
Depending on the lender, the loan’s conditions, and other variables, he or she may be able to obtain a secured loan even with a poor credit score. Even with a low credit score, the loan could still be authorised because the lender has the asset as security.
Lenders have different loan terms from one another. Some banks and NBFCs want a guarantee, while others do not if other circumstances are good.
The loan’s approval and EMI amount will rely on the income of the person and a few other variables, but he or she may choose the loan’s term.
The asset’s value that has been mortgaged determines the maximum loan amount for secured loans. The loan amount may be greater than the mortgaged property or less. But it is unable to go beyond it. Most of the time, the loan amount is not more than 85% of the market worth of the asset or property.
Borrowers may utilise secured loans for a variety of purposes. A home loan, for example, is available to individuals who require to purchase a property. In contrast to that, a loan against property is available to those who need a more significant sum for personal or professional purposes.
Except for loans against property that can be used for many purposes, the nature of a secured loan often determines what it will be used for. Borrowers cannot, for instance, utilise a vehicle loan for anything other than buying a car.