Secured Loans: Collateral Loan Types, Benefits, Interest Rates And Documents Required
A secured loan refers to a loan under which an individual pawns an asset to borrow money. The loan amount for this depends on the collateral’s value. In case of a default, the lending party can repossess, foreclose, size or liquidate this asset to compensate for the borrowed sum.
These loans often come with few qualification requirements due to their safe nature. As such, borrowers can get much-need cash to make high-value purchases.
Want to know the details of these loans? Keep reading!
Types of Secured Loans
The following loans come under the category of secured loans:
1. Home loan
Home loans are secured funds that enable you to purchase and create your dream house. Such loans can be of different types:
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2. Top-up loan
You can use this fund to renovate your old residence or design the interiors of your new house.
3. Balance transfer
You can transfer an existing loan to a new lender to avail of lower interest rates.
4. House construction loan
To construct a new residence
5. Land purchase loan
To buy a plot for a new residence
Sometimes, while purchasing a house, you need to deposit a down payment of about 10% to 20% of the house’s value to a lender (who finances the rest). Your earnings, liabilities and stability determine the value of home loans.
6. Loan against property
A very popular type of secured loan is a loan against property (LAP). An individual can pledge a commercial, industrial or residential property against a loan. The loan amount equals a specific percent of the property’s value. However, it varies from lender to lender.
Some may offer 80% of a property’s value, while others can keep 50% to 60%. You can use this loan for marriage or the education of your children. In addition, a business can utilise LAP for product development, R & D, expansion and more.
7. Loan against an insurance policy
Individuals can avail of loans against their insurance policies. However, all policies are not eligible for this. These loans are only applicable for money-back policies and endowments (having maturity values). In addition, the eligible policies will have to get a surrender value. Individuals can avail of a surrender value by paying premiums for 3 years regularly.
Term insurance plans do not qualify for this loan since they don’t possess maturity benefits. Besides, you cannot apply for loans against unit-linked policies because the returns depend on market fluctuations and are not fixed.
8. Loan against a fixed deposit
A fixed deposit offers guaranteed returns as well as loans against it. The borrowed amount against a fixed deposit can be around 70% to 90% of the deposit’s value, but it differs from lender to lender. However, a fixed deposit’s tenure has to be more than the repayment tenure.
A secured loan can be availed against units of your mutual funds. You can pawn your hybrid or equity funds to take a loan. To enter into a loan contract, you need to apply to your lender.
Next, the lender connects with your mutual fund registrar and confirms the number of units to be kept as collateral. Financiers generally give 60% to 70% of the value as a loan. Similarly, you can take a loan against shares wherein the loan amount equals some percent of the value of shares.
10. Gold loans
Gold has been a popular asset class over the years. You can get a gold loan by pledging your gold coins or jewellery. The borrowed amount is a specific percent of the asset’s value. Individuals usually apply for this loan to fulfil their short-term requirements. These loans have shorter repayment tenures than LAP and home loans.
Documents Needed for Secured Loans
You will require the following documents to get approval for a secured term loan:
- Identity proof such as employee ID, PAN card, voter ID, passport and driving license
- Age proof such as voter ID, passport and birth certificate
- Residence proof such as bank statement, a rental contract, internet or phone bill
- Income proof such as payslips of the previous three months or filled in Form 16 with a salary certificate
- Bank statements for the previous six months
- Stamp sized and passport-sized photographs
- Signature proof
Lenders may ask for a guarantor (not always). In the case of mortgage loans, you need to submit the details of the mortgaged property and the lease agreement. If you opt for a business loan, you need to place audited balance sheets (previous three years), promoter profile and company product range and profile.
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Features of a Secured Loan
Some of the crucial features of secured term loans are as follows:
- Flexible loan repayment offers compared to regular loans
- Lower lending risks and rates of interest
- Swift approval of a loan
- Consumers can customise loans based on their requirements.
- Applicants can choose between variable and fixed rates.
- Self-employed people, and corporate and proprietorship businesses can also avail of such loans.
- When a borrower defaults, financial entities can repossess his/her assets.
- Enhances a customer’s CIBIL score after repayment of the loan amount.
- These loans do not require guarantors.
Conditions for a Secured Loan
The eligibility criteria to opt for secured loans are as follows:
- You should be an Indian resident
- You must be 18 years or above
- Earnings include business income, non-salaried and salaried income
- Financial institutions often require a yearly income of Rs. 3,00,000 (minimum).
- An applicant, having a business, needs to prove that he/she has been operating and gaining from that business for the previous three years.
- A customer must possess an asset, the value of which must be greater than or equal to the loan amount.
Final Word
A secured loan minimises your financial burden at times of crisis and need. However, one needs to manage loan usage and repayment efficiently. You must know about the regulations, repayment schedules and interest rates of the lenders before taking a loan.
On the other hand, if you do not want to risk your valuables to get a loan, unsecured personal loans might be a better option. Navi offers personal loans of up to Rs. 20,00,000 with flexible tenure of up to 84 months. Download the Navi app to apply for it online.
FAQs
Ans: The following are the benefits of these loans:
• Applicability of higher loan amounts
• Loan processing and approval tend to be rapid, cheaper and simpler
• Secured loan interest rates are lower than unsecured loans
• No charges or penalties in case of pre-closure of loans or settlement payments
• You can customise your EMI payments throughout your repayment tenure
• Tax deductions for interest payables
• Minimum income eligibility is favourable
Ans: Some of the disadvantages related to these loans are as follows:
Lenders will seize the collateral in case you cannot repay the entire loan amount.
A long repayment schedule involves a greater cost for a borrower.
In case of default, your CIBIL score will drop drastically.
Ans: Unsecured loans do not keep collateral. In case a borrower defaults, the lender cannot possess his/her asset. Student loans, credit cards, and personal loans are some examples of this category. Individuals having high credit ratings can apply for this loan.
Ans: Following are some vital tax-saving options for house loans:
As per Section 24 of Income Tax, a borrower can claim a deduction on the interest amount of a home loan repayment. A maximum deduction of Rs. 2,00,000 is applicable under this provision.
Under Section 80C, a maximum deduction of Rs. 1,50,000 is available on the principal repayment amount every year.
Ans: Such loans serve two main purposes:
Borrowers can access a lump-sum loan amount at lower lending rates and favourable guidelines.
These loans ease the monetary burden of the lenders since they can avail of a valuable asset against payment default.
Before you go…
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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