Updated on October 4, 2023
Secured loans are among the common types of loans issued by banks and NBFCs. The meaning of secured loans and their related details are mentioned below.
Meaning of secured loans
Secured loans are a category of loans wherein the borrower pledges an asset as collateral to secure the loan. This collateral serves as a form of security for the lender, reducing the risk associated with the loan. In the event of loan default, the lender can take possession of the collateral to recover the outstanding debt. Secured loans are prevalent in various forms including home loans, car loans, gold loans, and loans against property.
Common Types of Secured Loans
Home Loans – The most common secured loan where the property being purchased serves as collateral. Home loans often have extended tenures, making it easier for borrowers to repay over time.
Car Loans – Car loans are secured by the vehicle being financed. These loans typically have shorter tenures than home loans.
Gold Loans – In gold loans, borrowers pledge gold jewellery or assets as collateral. These loans are known for their quick processing and are popular in the country.
Loan Against Property (LAP) – Borrowers can use their property as collateral to obtain a loan for various purposes, including business expansion, education, or debt consolidation.
Key features of secured loans
Secured loans are characterized by several key features. These loans require borrowers to provide valuable collateral, such as property, vehicles, or assets, as security for the lender. In return, secured loans typically offer lower interest rates due to reduced lender risk. Loan amounts are determined based on the collateral’s assessed value, and borrowers retain ownership of the collateral, with the lender having the right to seize it in case of default. Secured loans can serve various purposes and have varying tenures, with home loans having longer terms. However, there’s a risk of collateral loss if borrowers default, and timely repayments can positively impact credit scores. These loans also involve extensive documentation, including proof of collateral ownership and loan agreements.