Loan Secured Explanation, Classifications, Characteristics, Advantages, and Functioning Mechanism
Secured loans, a popular financing option, offer several advantages over unsecured loans. These loans are backed by collateral, an asset that the borrower pledges to the lender, reducing the risk for the lender and enabling better loan terms.
In the world of secured loans, there are various types to suit different needs. A gold loan allows you to borrow money in exchange for your gold jewellery or ornaments. On the other hand, a vehicle loan is available for purchasing two-wheeler or four-wheeler vehicles for personal use, with lenders offering up to 90% of the vehicle's on-road price as the loan amount.
Mortgage loans, another common form of secured loan, can be availed by providing immovable assets like residential property and commercial property as collateral to the lender. Home loans, a specific type of mortgage loan, enable you to buy a house in easy monthly installments (EMIs) instead of paying the full price all at once.
A loan against mutual funds depends on the mutual fund type and scheme, with banks or NBFCs generally offering no more than 90% of the policy's cash value as a loan to the borrower. Secured credit cards work similarly, with the borrower required to deposit some money in a fixed deposit in the bank as collateral before receiving the credit card.
Share-secured or savings-secured loans are personal loans that are secured using the balance in your savings account. A car title loan is a short-term loan where the borrower uses their car as collateral to avail of the loan amount.
In the case of a secured line of credit, the borrower maintains an immovable property as collateral with the bank to secure the line of credit, ensuring favourable terms on the loan agreement and lower interest rates. A life insurance loan is the amount availed by pledging your life insurance policy as collateral.
Secured bad credit loans are designed for borrowers with low or no credit score. These loans, such as bad credit loans, work on the principle of collateral security. The lender evaluates the creditworthiness of the individual and the value of the collateral to determine eligibility.
However, it's important to note that if the borrower defaults on a secured loan, the lender reserves the right to sell the collateral to recover the outstanding balance. This means that if you can't repay, you risk losing the collateral.
In contrast, unsecured loans do not require collateral, making them more flexible and quicker to obtain but usually come with higher interest rates and lower borrowing limits. They rely more heavily on your creditworthiness, so qualification may be harder for those with lower credit scores.
Secured loans offer several benefits compared to unsecured loans: they typically have lower interest rates, allow borrowing larger amounts, and are easier to qualify for, especially for borrowers with lower credit scores. They also often come with longer repayment terms, which can reduce monthly payments and ease cash flow pressure.
In summary, the core benefits of secured loans over unsecured loans are lower interest rates, higher borrowing limits, easier qualification, and longer repayment terms in exchange for using an asset as collateral. However, this also means that if you can't repay, you risk losing the collateral.
[1] Secured Loans vs. Unsecured Loans: Which is Best for You?
[2] Secured Loans: What You Need to Know
[3] Understanding Secured Loans: How They Work and Their Benefits
[4] What is a Secured Loan?
[5] Secured Loans vs Unsecured Loans: Key Differences
- Secured loans, such as mortgage loans, gold loans, and vehicle loans, offer benefits like lower interest rates, higher borrowing limits, and easier qualification for borrowers with lower credit scores, as they are backed by collateral.
- A car title loan is a short-term loan where the borrower uses their car as collateral to avail of the loan amount, while a life insurance loan is the amount availed by pledging your life insurance policy as collateral.
- Share-secured or savings-secured loans are personal loans that are secured using the balance in your savings account, and secured credit cards work similarly, with the borrower required to deposit some money in a fixed deposit in the bank as collateral before receiving the credit card.
- Loan against mutual funds depends on the mutual fund type and scheme, with banks or NBFCs generally offering no more than 90% of the policy's cash value as a loan to the borrower, and secured bad credit loans are designed for borrowers with low or no credit score, working on the principle of collateral security.
