Borrowers can use secured loans to get high-value funds for expensive expenses. Borrowers receive these loans in return for an asset. The requirements for secured loans are a little less strict than those for unsecured loans. Borrowers can obtain sufficient money with low interest rates through a secured loan. Let’s examine the meaning of a secured loan in more detail.
What is a secured loan?
- Secured loans are collateralized financial instruments that can be used to get funds for bigger expenses. In most cases, the collateral which is pledged is mostly home or land, however, some lenders also accept other types of investments as security such as bonds and valuable collectables.
- In case a borrower defaults on the secured loan, the lender can foreclose the loan by seizing the pledged collateral to recover the loan amount. Hence, secured loans are less risky for lenders as they can retrieve their funds. Because of this security, secured loans come with lower interest rates and less stringent eligibility criteria.
- Some secured loan examples are home loans, car loans, mortgage loan, secured Personal Loans, and secured credit card loans. In the case of secured and unsecured loans, a borrower with a high bureau score may qualify for an unsecured loan at a lower rate of interest. However, a borrower with a low bureau score may not qualify for the same loan and will have to submit collateral to avail of funds due to the risk involved. The choice between secured and unsecured loans depends on the borrower’s eligibility and repayment capacity.
Difference between unsecured loan and secured loan
| Secured Loan | Unsecured Loan | |
| Collateral | Yes | No |
| Interest Rate | Lower | Higher |
| Eligibility Criteria | Less stringent | Stringent |
| Default | The lender will seize the collateral | Missed payments will be sent to collections |
How to avail of a secured loan
You can avail of a secured loan from a traditional bank, a Non-Banking Financial Company (NBFC), or any other lending institution. The most common types of secured loans are home loans, auto loans, mortgages, secure credit card loans, and secured personal loans.
Before you apply for the loan, make sure you keep some factors in mind, such as:
- Check your bureau score: Your bureau score plays an important role in determining your eligibility for any kind of loan you may apply for. Having a healthy bureau score improves your chances of getting loan approval faster. If you have a poor bureau score, lenders might not trust you enough with the funds even after securing it with collateral. Hence, regardless of the type of loan you are applying for, make sure that you have a healthy bureau score.
- Assess the collateral value: Before applying for the loan, evaluate the value of the collateral you are planning to put up. This will help you determine the amount of funds you can avail of against your collateral.
- Calculate your budget: Since it’s a secured loan, make sure that you can pay your monthly instalment. Failure in doing so will result in default, which means the lender will seize your collateral. You can use an online EMI calculator to determine your monthly payments. Post that, you can plan your budget accordingly and keep aside your monthly EMI payments for better financial control.
In conclusion
Secured loans are offered by various banks, NBFCs, and lending institutions to help individuals avail of high-value funds. These loans are given out against collateral, which could be a property or a valuable asset. If you wish to borrow funds through a secured loan, make sure that you have a high bureau score, evaluate the value of your collateral, and calculate your monthly budgets accordingly so that you don’t miss out on any monthly payments.
