Secured loans are loans which require the borrower to pledge an asset or security to avail the loan. Home loans and car loans are the most common examples of secured loans where the borrower will be required to pledge the vehicle or house to be purchased as collateral, which then become secured debt. In case the borrower defaults on their loan repayment, the lender has full right to take possession of the collateral/secured debt. A secured loan is one of the best and assured sources of obtaining a high volume of funds.
There is a type of loan (under the category of secured loans) known as a non-recourse loan which protects the buyer. Under this loan, the bank has no further right to claim anything from the borrower apart from the asset pledged as collateral.
Foreclosure is the legal process by which banks auction/sell collateral property to pay off defaulted debt.
Repossession is when property (like a car) is taken back by the bank when payments on the same property are defaulted. This is for vehicle loans and loans for business assets. Example: If you buy a new car on loan and aren’t able to continue to make payments, the bank will come take your new car away, and you will forfeit all EMIs paid up to that date.
When there are unsecured loans readily available, why would a person chose to take up a secured loan? There are two primary reasons, from the point of view of the lender and the customer.
Lendersare relieved of some of the potential financial burden and loss that they could incur as a result of default on payments.
Borrowers are eligible for higher loan amounts that are given on more favourable terms and lower interest rates as they have pledged an asset as collateral.
Mortgage Loans are secured loans that pledge property as collateral
Nonrecourse loans
Car loans
Home loans
Most secured loans (home loans, car loans, business loans to purchase large assets) are sanctioned against a repossession clause, which should generally work for the benefit of the borrower, but more often than not, works in favour of the bank.
Loans are given against the title of ownership of assets, which will be used as collateral (like homes, vehicles, assets, property).
Lower interest rates as compared to unsecured loans, because the bank has a higher level of confidence in your ability to repay.
More flexible repayment options than regular loans.
Option of fixed rate and variable rate.
Loan approval is faster.
Customizable loans to cater to specific needs.
These loans are available to non-salaried individuals.
There is no need for a guarantor for these types of loans.
Banks and lenders can repossess assets for which loans were taken.
Improves CIBIL score once secured loan has been repaid in full. More favourable than unsecured loans.
You must meet the following requirements to be eligible for a secured loan:
Applicants must have reached the age of 18 years or older.
Applicant must be a resident of India.
Most banks and lenders require the applicant to have a minimum annual income of Rs.3 lakh per annum.
Income can be generated from regular salary, non-salaried income and business income.
For loans based on business income, the business must have been running and generating a profit for the last 3 years.
Applicant must have assets, whose value must match or exceed value of loan required.
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