A secured loan is a loan in which the lender is backed by the collateral or mortgage in the case of housing to get secured if the borrower shows inability to pay back the amount under the loan. Once a loan gets secured, a lien is created against the asset for which the lender excuses some right on the asset. Under the loan period, the borrower is barred from exercising certain rights as an asset owner if otherwise unsecured. When you apply for a secured loan, the lender will want to know which assets you plan to use to back the loan. The lender will then place a lien on that asset until the loan is repaid.
Did You Know? A lender is not considered as secure if the charge on the asset is not registered with the Registrar of Companies (ROC) in case the borrower is a company.
What is a Secured loan?
Loans can be secured or unsecured, whether for personal or business purposes. Moreover, the strength of your credit score and financial history determines how much money the lender would let you borrow. On the other hand, collateral is necessary to borrow for secured loans. In some circumstances, the asset you are using the money to buy may serve as the collateral for a secured loan.
The lender may take possession of the secured asset used to secure the loan if you fall behind on instalment payments, known as defaulting on the loan. So, for instance, the lender could start a foreclosure process on a home loan. The house would be sold at auction, with the money raised to pay off the unpaid loan.
Also Read: Types of Loan - What are different Types of Loan in India?
Types of Security
A loan may be secured through a charge on the assets. The charge can be created in the following forms :
1. Hypothecation
Hypothecation is created on a movable asset when the borrower holds the right to use the asset. The asset owner does not give up their title to use the asset, nor does the possession. When the borrower defaults on the payment, the lender must issue a court order to freeze the asset and sell the asset to recover the due on loan. The most common form of hypothecation is the car or other vehicle purchased on EMI or Easy Monthly Installment.
2. Pledge
Pledge is one of the oldest types of charge or security created on the movable property wherein the lender takes possession of the property subject to charge. In case the borrower defaults on the installment, the lender will freeze the asset under possession and issue a notice to make good the defaults. If the default is not made good, the lender will hold the asset under auction to recover the debt.
3. Debt
It refers to the charge or colleterial on immovable property like land, buildings and housing. The most common form of mortgage is housing. It is created on a preconceived notion of having a secure loan.
Also Read: Government Loan Schemes for Small Businesses In India
Types of Secured Loans
Depending on the loan's terms, multiple types of secured loans can exist. Following are a few of them:
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Home Loan
In contrast to a loan for acquiring a piece of commercial or industrial property, a house mortgage is a loan provided by a bank or other financial institution to purchase a residence or an alternative investment.
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Car Loans
Car loan is a form of financial help used to buy a car with little or no upfront cash outlay. The lender's loan can be returned over a certain time in equal monthly installments with an agreed-upon interest rate. Car loans are typically secured by the actual vehicle being purchased. It is utilised as a guarantee for the auto loan. If the loan is not repaid within the allotted time, the lender may seize and sell your car to satisfy the debt.
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Gold Loans
A gold loan, also known as a loan against gold, is a secured loan obtained by the borrower from the lender in exchange for the pledge of certain gold items (within the range of 18 to 24 carats) as security. Based on the gold's current market worth and quality, the loan amount is normally up to 80% of the gold's value. When it comes to satisfying your immediate financial needs, such as paying for international education, wedding expenditures, urgent medical care, or any other personal usage, a gold loan is as good as a personal loan.
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Loans against Shares and other Financial Securities
When you take out a loan against securities, you offer the bank your stocks, mutual funds, or life insurance policies as security in exchange for the loan amount. After you have deposited your securities, a loan against securities is normally made available to you as an overdraft facility in your bank account. You can withdraw money from the account, and the only amounts for which interest is charged are the loan amount and the time for which it was used.
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Loans against fixed deposits
Customers can use their fixed deposit as security for a loan, which is a sort of secured loan. The amount of the FD deposit determines the loan's amount. This may equal 90% to 95% of the initial deposit. People hunt for funding solutions like loans and other lending chances during a financial emergency or financial constraint. One of those essential sources is thought to be borrowing against fixed-income investments (FD). This is a quick technique to approach financial institutions for short-term loans. You can easily choose to get a loan against your FD from the bank where you already have fixed deposits instead of prematurely terminating them.
Also Read: How to get an MSME loan without collateral?
Conclusion
Secured loans are one the most viable forms to negotiate a loan on low-interest terms. Due to the security involved, the banks usually offer the loan at low interest to the borrower. There are various ways through which a bank accepts security, the most common way is the mortgage to secure a housing loan, a pledge to secure gold loans, and hypothecation for a car loan.
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