A loan is said to be secured when borrower is asked to pledge his/her assets as security or collateral for the loan.
The financial company or bank will hold the “Deed or Title” until the loan is paid in full including interest. In case of any unpaid amount the loan can be recovered by the collateral given by the borrower. If any item purchased say, Home or a Car, those can be used as collateral and a lien is placed on such item. Other items like stocks, bonds or personal properties can also be put as secure for the loan.
Examples of Secured loans:
- Mortgage loan
- Auto loan (New & Used).
Advantages of secured loans:
Secured loans have many benefits when compare to that of unsecured loans:-
- Lower interest rates: Secured loans offered at lower interest rates. Since banks and financial company keep collateral as security in case of any unpaid EMI’s.
- Limits on loans: Higher borrowing limits and longer repayment terms are available. Secured loans are usually best to obtain larger amount of loan but keeping something as collateral. Banks will approve loan amounts closer to the value of collateral asset worth.
- Flexible repayment terms: Secured loans comes with flexible repayment terms, it means no worries about fines, charges on settlement payment, pre closure or making a bigger amount payment if you suddenly come into some money.
- Flexible repayment tenure : It customizes our payment and gives option to repay loan faster with bigger EMI or if need with longer period in form of smaller EMI
Disadvantages of secured loans:
There are some disadvantages for secure loan going through advantages as well.
- Terms and conditions: As it is a loan processed by keeping some asset as collateral it takes some longer time to verify everything belongs to himself or someone else. However a friendly and longer relationship with bankers and NBFC makes it somewhat quicker by keeping customer in priority list.
- Collateral seizing: Asset will be locked and given with higher loan amount and a lower rate of interest, and one must be ready to surrender his/her asset as collateral to want loan.
- Repossession: Taking repossession by the loan issuer in case of any default or miss payment in the EMI towards the loan taken and once asset is repossessed then the paid EMI till that date is also not given back and person will be at complete loss along with interest paid till that time.
- Heavy paper work: Secured loans required lot of paperwork as one has to submit original asset documents that relate to the ownership along with regular supporting documents like identity, age and address proof. Lot of specimen signatures also required on each and every document.
- Full ownership of collateral asset: Collateral should be completely under his/her ownership If it is owned in sharing then it will be at complicated ted way to issue loan so as to get all clarification from the second person in case of any default of loan. An agreement is taken priory to be safe side from issuer end.
- CIBIL score: It’s affected greatly if you default in paying the EMI and becomes very difficult in getting any type of loan in future. So that if bank seizes your asset and it could be tough time to get back “CIBIL” score in normal range.