Secured Loans

The features of each specific secured loan differ from one another. However, they have a few general characteristics in common:

• Asset Required as Collateral: It is taken against a property or asset which is given as collateral. The loan can be up to 85% of the value of the property.
• Low Interest Rates: When compared with unsecured loans, the interest rates for these loans are much lower. This is because banks face lower risk in case of default.
• Available for All: It can be taken by salaried as well as non-salaried individuals, as well as proprietorship and corporate businesses.
• Customisable: The loan can be customised according to the applicant’s needs. For instance, the loan offers flexible repayment options. Additionally, the applicant can choose the type of interest they want. Most banks offer a mix of fixed and variable interest rates. Banks also offer flexible loan tenures.
• No Guarantor Needed: There is no need for a guarantor for this loan.
• Quick Processing: The processing and approval are quicker.
• Improves Credit Score: Timely repayment of the loan improves your credit score.
• Possibility of Asset Takeover: Banks and lenders can repossess your assets if you fail to repay your loan.

As with the features, the eligibility criteria are different for each specific type of secured loan. However, they do have some common criteria. For instance:

• The applicant must be at least 18 years of age.
• The applicant must be a resident of India.
• The asset put up as collateral must be the same or exceed the value of the loan.
• In case of a business loan, the business in question should have in operation for at least 3 years.
• Salaried, non-salaried and self-employed individuals can apply but need to meet the specific criteria needed for each.

The following documents are required for different types of secured loans:

Mortgage Loans / Loan Against Property

• ID Proof: Copy of one of the documents: Voter Card / Aadhaar Card / Passport / PAN Card
• Age Proof: Copy of one of the documents: Passport / Driver’s License / Aadhaar Card
• Residence Proof: Utility Bills / Rent Agreement / Passport
• Income Proof: Salary slips for the last 3 months. Banks also ask for IT returns and / or Form 16
• Bank Statement: Bank Statement of the last 6 months that have been duly authenticated
• Proof of Signature: This is done to authenticate your signature on documents
• Property Papers: Original documents of the property that has been put up as collateral
• Passport size photographs
• Duly filled application form

Home Loan

• ID Proof: Copy of one of the documents: Driver’s License / Aadhaar Card / Passport
• Age Proof: Copy of one of the documents: Passport / Driver’s License / Aadhar Card
• Residence Proof: Copy of one of the documents: Utility Bills / Passport / Lease Agreement
• Income Proof: Salary slips of the past 3 months in addition to IT returns and / or Form 16
• Bank Statement: Authenticated statements of the past 6 months are needed
• Proof of Signature: This is done to authenticate your signature on documents
• Property Papers: All property papers in original need to be submitted to the bank
• Passport size photographs
• Duly filled application form

Car Loan

• ID Proof: Copy of one of the documents: Voter Card / Aadhaar Card / Passport / PAN Card
• Age Proof: Copy of one of the documents: Driver’s License / Passport / Aadhaar Card
• Residence Proof: House Tax Receipt / Electricity Bill / Water Bill
• Income Proof: Salary slips of the past 3 months / IT returns / Form 16
• Bank Statement: Authenticated bank statement of the previous 6 months
• Proof of Signature: This is required from the bank
• Passport size photographs
• Application form, duly filled

Business Loans

• ID Proof: Copy of any one of the following documents: PAN Card / Driver’s License / Aadhaar Card
• Residence Proof: Copy of any one of your Telephone Bill / Lease Agreement / Electricity Bill / Water Bill
• Company Profile: Information regarding the company’s products and services
• Financials: The balance sheet and profit and loss accounts of the company for the past 3 years.
• IT Returns: The IT returns filed by the company for the last 3 years
• Bank Statements: The bank statements for the last few months are needed
• Management: Profile of the promoter
• Property Papers: Original documents of the property if put up as collateral
• Passport size photographs
• Application form, duly filled

The secured loans offer a number of benefits for the borrower. Some of these are:

• Low Interest Rates: Since the loan is taken against collateral, the bank can offer loans at low interest rates. This is because the mortgaged property minimises the risk, so the bank has faith in the repayment capacity of the applicant.
• Higher Amount of Loans: Large loans can be taken based on the value of the property that has been put up as collateral. It must be noted though, that the loan amount cannot exceed the value of the mortgaged property (in most cases, the upper limit is 75-85%).
• Quicker Processing and Approval: The loan procedure is not time consuming. Quick processing and approval make this a comfortable experience.
• Flexible Loan Repayments: Secured loans give the applicants multiple ways of repaying the loan. The applicant can pay back the loan through ECS mandated EMIs or post-dated cheques, for instance. They can also prepay their loan if they have additional money on them.
• Bad Credit Score Applicants: Individuals with a bad credit score can also avail this loan. Timely payment of a secured loan will greatly boost the credit score of the applicant.
• Tax Deductible: In case of home loans, the interest on the loan is tax deductable. This will save the applicant a lot of money.
• Low Minimum Income Standard: The minimum income bar for secured loan applicants is low. This is because the applicant has already assured the bank of their repayment capacity by mortgaging their property.

Though secured loans are a great way to finance large purchases, there are certain factors that one must keep in mind when they take such a loan.

• Collateral: In a secured loan, a property or asset has to be kept as collateral in order to avail a loan. If the applicant is unable to repay the loan, then they will end up forfeiting the said property.
• Paperwork: This loan requires more paperwork than an unsecured loan. This may make the whole process cumbersome for certain applicants.
• Loan Based on Collateral: The loan amount taken can only be up to a certain value of the asset or property that has been kept as collateral. This limits the amount of loan that an applicant can borrow.
• Full Owner of Property: The applicant must be a complete owner of the property that has been kept as collateral.
• Floating Rate of Interest: The EMI amount paid on a floating interest rate fluctuates. This is because on a floating rate of interest, the rate of interest keeps changing based on the market conditions and RBI policies. This creates problems for loan applicants as their EMI amounts will keep going up and down. This may disrupt the applicant’s expenditures and budget.
• Lender at an Advantage: In a secured loan, the lender is always in an advantageous position. The deal is tilted in their balance. It does not matter whether the applicant is able to pay back the loan or not, as the lender will recover the cost.

Here are a few FAQs that people have on these secured loans: 

Q. Why should one go for a secured loan?

A. Secured loans are the best option for many reasons. The loan can be taken up to the value of the property. The borrowers get low interest rates and they can pay back the loan amount over a period of time. Moreover, applicants who do not have a strong credit history can get the loan easily.

Q. What happens to the mortgaged asset if the applicant is unable to repay the loan?

A. If the applicant is unable to repay the loan, then the mortgaged property changes hands. The bank / lender become the new owner of the property and they choose to sell or rent the said property in order to recover their losses.

Q. Is there a penalty on late EMI payments?

A. Yes, banks charge a penalty on late EMI payments. Therefore, it is advised that applicants make their repayments on time. 

Q. Is there a charge on prepayments?

A. Banks have certain conditions on prepayments. For instance, banks will charge a penalty on prepayments if these payments are made within a six month period. But, they might not charge anything if the prepayment is made after six months from the date the loan was taken. Readers should note that most home loans do not have a prepayment fee. They should contact their bank for more details on these charges, if any.

Q. What is the maximum amount that can be borrowed?

A. In secured loans, the amount of loan that can be borrowed depends on the value of the property that has been mortgaged. The loan amount can either be equal to or less than the mortgaged property. It, however, cannot exceed it. In most cases, the amount of loan does not exceed 85% of the market value of the asset or property.

Q. What is the eligibility criterion for availing a secured loan?

A. The applicant must be at least 18 years of age and a resident of India. They should have a minimum salary income as prescribed by the bank. If they have their own business, then the business should be operational for at least 3 years. The loan amount cannot exceed the value of the asset. Salaried, non-salaried and self-employed individuals can apply for a secured loan.

Q. What is an EMI and how is it calculated?

A. Equated Monthly Instalments (EMIs) are monthly payments that the applicant pays in order to foreclose their loan. The EMI amount is calculated based on the principal amount, rate of interest and the loan tenure. The EMI calculator is an online tool that can be used to ascertain the EMI amount. Once the EMI amount is known, the applicant can plan their expenditures accordingly. You can use the Paisabazaar EMI tool to understand better how much loan you should take and the EMIs that you will have to pay, among others.

Q. What is the difference between fixed and variable rates of interest on secured loans?

A. In a fixed rate of interest, the EMI amount remains the same. However, in a variable rate of interest regime, the EMI amount fluctuates as the rate of interest keeps changing. This makes this rate of interest comparatively unpredictable.

Q. What are the different types of secured loans?

A. The different types of secured loans include, among others:

• Mortgage loan or loan against property
• Car loan
• Home loan
• Business loan

Q. What are the different uses for which one can use secured loans?

A. Borrowers can use secured loans for different reasons. People who need a home, for instance, can take a home loan while those who need a larger sum for business or other personal reasons can use a loan against property. In most cases, except for loan against property that can be used for multiple reasons, the end use of the secured loan is defined by its type. For example, you cannot use a car loan for anything else other than purchasing a car.