Secured loans 101: Understanding the basicsMay 11, 2023 . Home Buyer's Guide . 10 min read
Secured loans can be a smart financial decision for those looking for a larger sum at a lower interest rate. However, before jumping into a secured loan, it’s important to understand the basics. From eligibility criteria to benefits, understanding the nuances of secured loans can help you make an informed decision about whether this type of loan is right for you.
In this blog, we’ll explore the fundamentals of secured loans, including what they are, how they work, and what you need to know before applying for one.
What are secured loans?
A secured loan is a type of debt that requires the borrower to pledge an asset as collateral to obtain funds. The asset can be an immovable property, such as a house or land, or movable assets, such as a car or stocks. By pledging the asset as collateral, the borrower reduces the risk for the lender, who can offer more flexible repayment terms and lower interest rates.
In case the borrower defaults on their loan repayment, the lender has full right to take possession of the collateral. A secured loan is one of the best and assured sources of obtaining a high volume of funds. They are easier to obtain than unsecured loans, which do not require collateral but come with higher interest rates and stricter eligibility criteria.
Features of secured loans
The following are some of the most important features that make secured loans an appealing choice for borrowers:
● Collateral requirement
One of the main features of secured loans is that they require the borrower to pledge an asset as collateral, such as property or movable assets. This provides lenders with added security and reduces the risk of default.
● Low interest rates
The interest rate on secured loans is generally lower when compared to those of unsecured loans, as lenders are able to provide better conditions owing to the decreased risk linked with loans that are secured by collateral.
● Wide availability
Secured loans are available to a variety of borrowers, including both salaried and non-salaried individuals, as well as small businesses and corporations.
● Customizable options
Another key feature of secured loans is their flexibility. Borrowers can often customise their loans to meet their specific needs, including selecting repayment options and choosing between fixed or variable interest rates.
● No guarantor required
Unlike some other types of loans, it do not require a guarantor. This can make them a more accessible option for borrowers who may not have a strong financial network.
● Asset takeover possibility
Finally, it’s important to note that secured loans come with the risk of asset repossession if the borrower defaults on the loan. This makes it crucial for borrowers to fully understand the terms of their loan and ensure that they are able to make payments on time.
What is the eligibility for secured loans?
In order to be eligible for a secured loan, borrowers must meet certain criteria. Here are some general guidelines for secured loan eligibility:
1. Age requirement
While the legal age for contracting in India is 18, most banks require borrowers to be at least 21 years old to qualify for a secured loan.
2. Indian residency
To qualify for a secured loan in India, borrowers must be Indian residents. Some banks may also offer loans to NRIs, NREs, and NROs, but the terms and eligibility criteria may vary.
3. Minimum annual income
To be eligible for a secured loan, many lenders typically mandate a minimum annual income of ₹ 2,50,000 lakhs or more, though this criterion can fluctuate depending on the lender as well as the loan amount.
4. Eligible applicants
Secured loans are typically available to a variety of applicants, including salaried individuals, self-employed professionals, business institutions, HUFs, and farmers.
5. Adequate collateral
Possessing assets of adequate value to match the loan amount is considered one of the fundamental prerequisites for obtaining a secured loan. These assets will be offered as collateral against the loan, providing lenders with added security and reducing the risk of default.
Benefits of secured loans
Secured loans come with a range of benefits for borrowers, making them an attractive financing option. Listed below are several key advantages associated with secured loans:
● Higher loan amounts
With secured loans, borrowers can avail of larger loan amounts that are contingent upon the value of the collateralized property. Nevertheless, it is crucial to note that the loan amount cannot surpass the appraised value of the mortgaged property.
● Flexible repayment options
Borrowers have the flexibility to choose from multiple repayment options for secured loans. For example, they can opt to pay back the loan through E-NACH mandated EMIs or post-dated cheques. Additionally, they can choose to prepay the loan if they have additional funds available.
● Accessible to individuals with an average credit history
Even individuals with an average credit score can avail secured loans. Making timely payments on a secured loan can help improve the credit score of the borrower over time.
● Tax benefits
Home loans have an additional advantage of tax deductibility on the interest payments, which can effectively lower the overall borrowing expenses.
● Low minimum income requirements
The minimum income requirement for secured loan applicants is relatively low. This is because the applicant has already assured the bank of their repayment capacity by offering an asset as collateral.
Secured loans can prove to be an excellent option for individuals who need a large amount of money and are willing to put up collateral in exchange. With the potential for higher loan amounts, flexible repayment options, and the ability to improve credit scores, it provide borrowers with a number of benefits. If you’re considering a secured loan, make sure to do your research and go for a lender that offers favourable terms and interest rates.
Interested in exploring secured loans for your financial needs? Look no further than HomeCapital. We offer interest-free smart credit for all your home related needs. Get in touch with HomeCapital now to discover further details and commence the initial phase towards safeguarding your financial future.
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