When individuals or businesses require financial assistance, they have two primary borrowing options: secured loans and unsecured loans. Secured loans are backed by collateral, which reduces risk for the lender and often results in lower interest rates. Borrowers can pledge various assets such as property, fixed deposits, shares, insurance policies, or other financial securities to secure a loan.
Understanding the types of secured loan available and their benefits can help borrowers choose the right financing option based on their needs. This article explores different types of secured loan, their features, and a comparison of secured loan vs unsecured loan to help borrowers make informed financial decisions.
What is a secured loan?
A secured loan is a type of loan where the borrower provides an asset as collateral to the lender in exchange for funding. This collateral acts as security, ensuring that the lender can recover the loan amount in case of default.
Secured loans typically offer lower interest rates, longer repayment tenures, and higher loan amounts compared to unsecured loans. The loan amount sanctioned depends on the value of the collateral, and repayment terms vary based on the type of loan.
Types of secured loans
1. Loan against property
A loan against property (LAP) is a secured loan where borrowers pledge their residential, commercial, or industrial property as collateral to obtain funds. This type of loan is suitable for various financial needs, including business expansion, debt consolidation, or medical emergencies.
Key features:
Loan amount up to 60-70% of the property value.
Long repayment tenure of up to 15-20 years.
Lower interest rates compared to unsecured loans.
Retain ownership of the property while using it as collateral.
2. Loan against fixed deposit
A loan against fixed deposit (FD) allows borrowers to access funds without breaking their FD investment. The bank provides a loan based on the FD value, and the borrower continues earning interest on the deposit.
Key features:
Loan amount up to 90% of the FD value.
Interest rate is 1-2% higher than the FD interest rate.
No processing fees or penalties for prepayment.
The FD continues earning interest while being used as security.
3. Loan against securities
A loan against securities (LAS) is a financial product that allows borrowers to pledge investments such as shares, mutual funds, bonds, or life insurance policies as collateral. This type of loan provides liquidity without selling valuable investments.
Key features:
Loan amount up to 85% of the asset value.
Interest is charged only on the amount utilised.
No restriction on end use of the loan.
Quick approval with minimal documentation.
Common securities eligible for LAS include:
Demat shares
Mutual funds
Exchange-traded funds (ETFs)
Government bonds
Life insurance policies
4. Gold loan
A gold loan allows borrowers to pledge gold jewellery or coins as collateral to obtain quick funds. It is commonly used for short-term financial needs, including weddings, education, and emergency expenses.
Key features:
Loan amount up to 75-90% of the gold value.
Competitive interest rates based on market conditions.
Minimal documentation and quick disbursal.
Flexible repayment options, including bullet repayment.
5. Home loan
A home loan is a long-term secured loan that helps individuals purchase residential property. The property itself serves as collateral until the borrower repays the loan in full.
Key features:
Loan amount up to 75-90% of the property value.
Long repayment tenure of up to 30 years.
Tax benefits on principal and interest payments.
Fixed and floating interest rate options.
6. Vehicle loan
A vehicle loan helps individuals purchase a car or two-wheeler by pledging the vehicle itself as security. The lender retains ownership of the vehicle until the loan is repaid.
Key features:
Loan amount up to 90% of the vehicle’s on-road price.
Fixed interest rates with repayment tenure up to 7 years.
Easy financing for new and used vehicles.
No collateral required beyond the vehicle itself.
7. Loan against insurance policy
A loan against insurance policy allows policyholders to borrow money by pledging their life insurance policy as collateral. The loan amount is based on the policy’s surrender value, and it does not affect the policy’s coverage.
Key features:
Loan amount up to 80-90% of the policy’s surrender value.
Competitive interest rates.
Quick loan approval without affecting the insurance benefits.
No credit score verification required.
Secured loan vs unsecured loan
Understanding the differences between secured loan vs unsecured loan helps borrowers select the best financing option based on their financial situation.
Benefits of secured loans
1. Lower interest rates
Since secured loans involve collateral, lenders offer lower interest rates compared to unsecured loans. This makes them a more affordable borrowing option.
2. Higher loan amounts
With a secured loan, borrowers can access larger loan amounts, depending on the value of the collateral provided.
3. Flexible repayment terms
Secured loans come with longer repayment tenures, making them easier to manage financially.
4. Easy approval for individuals with low credit scores
Since secured loans are backed by assets, lenders are more lenient towards borrowers with low credit scores, making them more accessible.
5. Retain ownership of pledged assets
For loans against FD, securities, or insurance policies, borrowers can use the loan amount without losing ownership of the pledged assets.
Conclusion
Secured loans offer borrowers access to funds at lower interest rates, with flexible repayment options and higher loan limits. Whether choosing a loan against property, loan against securities, gold loan, or vehicle loan, each type of secured loan serves a specific financial need.
Understanding the types of secured loan and the differences in secured loan vs unsecured loan enables borrowers to make informed financial decisions. By leveraging assets wisely, borrowers can achieve financial stability while ensuring minimal borrowing costs.
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