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What is Secured Loan? and types of Secured Loan

  • 29-Apr-2022
What is Secured Loan? and types of Secured Loan

A secured loan is a form of debt where the borrower mortgages their immovable property to get the required funds.  

The loan amount offered to the borrowers is based on the value of security or collateral. 

There are several banks and financial bodies that will authorize the ownership deed of security till the borrowed amount is paid off. 

The borrower can avail a lower rate of interest with a flexible repayment tenure because the borrower has given their property as security or collateral and the lender can have the benefit of the lower risk profile. 

                                                   @contentImg

 

Types of secured loan 

Listed below are the several types of secure loan: -  

Loan against property Working capital loan LC Discounting  
Used Car loan  Letter of credit Bank overdraft 
Home loan  NRI home loan Business loan  
Loan against rent receivable NRI loan against property Commercial property loan 
Infrastructure construction loan Loan against bank guarantee Building inventory funding 
Used car loan  Drop line overdraft Bank guarantee 
Loan against securities Home construction loan Industrial property loan 

 

Loan against property  

A loan against property is a secured loan that is offered by banks or financial institutions against freehold residential, constructed, or commercial properties. It is also called mortgage loan.  

Interest rate  @7.00%  
Loan tenure  Up to 15 years 
Loan amount  Up to 130% of property value 
Processing fee  1% to 2% of the loan amount 

 

Working capital loan 

A working capital loan is a loan that can be used to finance the daily operations of a business. It can be used to cover recurring expenses like wages, rent, accounts payable, etc.  

Interest rate  @6.00% 
Loan amount  200% of the property value 
Processing fee  0.5% to 2.00% 

 

Commercial property loan  

A commercial property loan is the credit option that lenders provide against the mortgage of commercial property. These loans are of two types i.e., retail outlet and office space. 

Interest rate  @7.25% onwards per annum  
Loan amount  From Rs. 5 lakhs to Rs. 5 crores 
Repayment tenure  Up to 15 years 
Processing fee  Up to 1% of the loan amount  

  

Loan against rent receivable 

A loan provided by lenders keeping the future rent of the property as collateral. It can be taken by those applicants who own any kind of property. 

Interest rate  @8.75% onwards  
Loan amount  Up to 85% of property value  
Processing fee  0.5% to 1% of the loan amount  

 

Bank overdraft  

A bank overdraft loan is offered by the banks that allow the borrower to pay for bills and other expenses when the account balance reaches zero. The rate of interest of bank overdraft is @9.00% onwards with a flexible repayment tenure. 

 

Home loan 

A home loan is a secured loan that can avail from banks, NBFCs, or financial institutions for the purpose of purchasing a residential property.  

Interest rate  @6.40% onwards 
Loan amount  90% of the property value  
Processing fee Up to 0.5% to 2% 

 

Home construction loan  

Home construction loan is a loan that is offered to individuals who own a piece of land and do not have the fund to construct their home. 

Rate of interest  @6.95% onwards  
Loan amount  Up to Rs. 3.5 crores  
Loan tenure  Longer tenure  
Processing fee  @0.5% to 2.00%  

 

Purpose of secured loan 

Secured loan provides opportunities to the borrowers to avail the required finance on better terms. It can be used for many different purposes such as bad credit loans, vehicle loans, mortgages loans, etc. 

 There are 2 factors from the banker's and borrower's points of view. 

  • Borrowers: - The borrowers are eligible for the lower interest rates and high loan amount that are given on favorable terms as they have pledged an asset as security.
  • Lenders: - lenders get the assurity of loan repayment even though the borrower makes default on payment.

Pledged collateral can be used as loan coverage while on the other hand an unsecured loan carries a high risk of default. 

 

Key features  

  • The approval of loan is fast.

 

  • Credit score can be enhanced with secured financing.

 

  • Loans are offered against the assets which will be used as collateral like home, property, assets, vehicles, etc.

 

  • Option of flexible repayment.

 

  • Choice of fixed or variable rates.

 

  • Secured finance can be opted for the high loan amount.

 

  • It can be available by salaried, non-salaried or self-employed individuals.

 

  • It has low interest rates, as the lenders have trust in the ability of the borrower to pay it back.

 

  • There is no requirement of guarantor for such loans.

 

  • Lenders can reclaim the assets for which loans are taken.

 

  • More open-ended repayment options than the other loans.

 

Top providers of secured loans 

Bank name  Home loan  Used Car loan LC Discounting 
Axis bank 6.70% 14.80% 8% 
State Bank of India 6.70% 9.90% 8% 
Kotak Mahindra Bank 6.65% 11.20% 5% 
ICICI Bank  6.70% 10.20% 5.50% 
HDFC Bank  6.65% 13.75% 8% 

 

Benefits of secured loan 

Low interest rates: - Collateral loans are offered at a lower interest rate, as the borrower takes loan against collateral and the banks have trust in the repayment capacity of the borrowers. 

 

High loan amount: - Banks provide large amount of loans, as the risk and liability are reduced.  

 

Fast processing and approval: - The procedure of loan does not take much time, therefore there is quick approval of loan. 

 

Flexible repayment tenure: - Under collateral loan, borrowers have a choice of repayment options that increase the flexibility of repayment. 

 

Tax Deductible: - For home loans, the interest on the loan amount is tax deductible and saves money of the individual. 

 

Eligibility criteria 

  • The minimum age criteria of the borrower are 18 years of age.

 

  • The nationality of the applicant must be the resident of India.

 

  • Many lenders required the borrowers to have a minimum annual income of at least Rs. 3 lakhs per annum.

 

  • Some banks also provide loans to NROs, NREs, and NRIs.

 

  • The loan may also be granted to the farmers and Hindu Undivided Family (HUF).

 

  • The applicant must have assets that match the value of the loan or exceed the value of the loan.

 

 

Pros and Cons of secured loan  

Pros  Cons  
The banks will provide a higher borrowing limit that permits to get a large amount of loan. Floating interest rate can led to repayment tenure. 
The borrower can pay the nominal rate or interest on the borrowed amount. The possibility of losing collateral may occur if the applicant failed to pay the borrowed amount. 
A loan can be offered for a longer repayment tenure. A longer repayment schedule might result in a high interest payable over the tenure. 

 

 

What can be used as collateral? 

Applicants can pledge various types of assets. Given below are some assets that are commonly used as collateral or security. 

  • Real estate house property, home
  • Cars, trucks, bikes, etc.
  • Mutual funds, insurance policies, share certificates, bonds.
  • Valuables, gold jewelry, high-end collectibles.

 

Documents required for secured loan 

 

Working capital loan 

  • Duly filled application with 2 passport-sized photographs
  • KYC documents such as PAN Card, Aadhaar card, Driving license, Passport..etc.
  • Bank statement of salary account of previous year.
  • Income Tax Return with computation of income for the previous 3 years form-16 (if filed).
  • Salary slip for previous 3 months and appointment letter.
  • Sanction letter and loan schedule (if running).
  • A cheque for Processing fee for banks.
  • Complete property documents with ATS + MAP and Chain.

 

Home loan 

  • Duly filled application with 2 passport-sized photographs
  • KYC documents such as PAN Card, Aadhaar card, Driving license, Passport..etc.
  • Income Tax Return with computation of income for the previous 3 years form-16 (if filed).
  • A cheque for Processing fee for banks.
  • Bank statement of salary account of previous year.
  • Sanction letter and loan schedule (if running).
  • Complete property documents with ATS + MAP and Chain.
  • Salary slip for previous 3 months and appointment letter.

 

Used car loan 

  • Duly filled application with 2 passport-sized photographs
  • KYC documents such as PAN Card, Aadhaar card, Driving license, Passport..etc.
  • LAST 3 MONTHS SALARY SLIP + APPOINTMENT LETTER
  • Sanction letter and loan schedule (if running).
  • Complete property documents with ATS + MAP and Chain. roof.
  • Income Tax Return with computation of income for the previous 3 years form-16
  • A cheque for the Processing fee for banks.
  • Bank statements for the last 1 year of salary account.

 

Loan against property  

  • Duly filled application with 2 passport-sized photographs
  • KYC documents such as PAN Card, Aadhaar card, Driving license, Passport..etc.
  • Bank statement of salary account of the previous year.
  • Income Tax Return with computation of income for the previous 3 years form-16 (if filed).
  • Salary slip for previous 3 months and appointment letter.
  • Sanction letter and loan schedule (if running).
  • A cheque for the Processing fee for banks.
  • Complete property documents with ATS + MAP and Chain.

 

LC Discounting 

  • Duly filled application with 2 passport-sized photographs
  • KYC documents such as PAN Card, Aadhaar card, Driving license, Passport..etc.
  • Proof of firm address – Utility bill or electricity bill.
  • Certificate of GST.
  • GST Return of the previous year.
  • Complete property documents with Chain and MAP.
  • The provisional financial year 2019-20.
  • Bank statement of all the accounts of the firm for the last year.
  • Recent sanction letter, repayment schedule, or track records (if running any loan).
  • Saving account statement of 6 months of all partners.
  • Income Tax Return (ITR) of all the partners for previous the 3 years + computation.
  • ITR, P/L, Account balance sheet + all ANNEXURES.

 

How is collateral-free loan different from a collateral loan? 

  • The amount of a collateral loan is comparatively high, whereas an collateral-free loan has a lower amount.

 

  • The repayment tenure of a collateral loan is from 15 to 30 years and the tenure of an collateral-free loan is up to 5 years.

 

  • The borrowers are required to pledge an asset to avail a collateral loan, whereas a collateral-free loan does not require any collateral or security.

 

  • As compared to collateral-free loans, the interest rate of collateral loans is low.

 

  • Collateral loans require more documentation as it is necessary to provide complete property documents.

 

  • The speed of disbursement of collateral loans is low, while the process of collateral-free loans is fast.

 

  • Examples of collateral loans are home loans, car loans, loan against property, etc.

 

  • Examples of collateral-free loans are credit card purchases, education loans, personal loans, etc.

 

Secured loan vs unsecured loans 

Details  Secured loan  Unsecured loan 
Loan amount  High  Low  
Loan tenure  15 to 30 years Up to 5 years 
Collateral  Required  Not required  
Rate of interest Low  High  
documentation More documents required  Less documentation  
Speed of disbursement  Slow  Very fast  
Examples  Home loan, loan against property, car loan, etc.  Education loan, personal loan, credit card purchase, etc.  

 

 

How to apply for a secure loan? 

Step by step to apply online: - 

Step 1: - Visit the official website of your preferred bank & verify your loan eligibility. 

 

Step 2: - With the use of EMI calculator, you can calculate your monthly payable EMI. 

 

Step 3: - After evaluating your EMI, start filling in the application form. 

 

Step 4: - Enter all the required details and select the needed loan amount and loan tenure.  

 

Step 5: - After filling in the application form, click on ‘Submit’. 

 

Step 6: - Then, the bank representative will get in touch with you for further formalities after reviewing your application. 

 

Step by step to apply offline  

Step 1: - Visit the bank branch of preferred lender. 

 

Step 2: - Ask for a secure loan application form and fill in all the required information. 

 

Step 3: - Submit all the relevant documents such as age proof, income, address, identity, etc. 

 

Step 4: - The bank representative will verify documents and check the eligibility of the borrower.  

 

Step 5: - Then, the amount of the loan will be transferred to the bank account of the borrower.  

 

Financeseva offers more than 80+ customized loan products for individuals and businesses. Applying with financeseva will help you to get the best loan offers at a single platform and easy approval. 

Also read: - Difference Between Secured Loan vs Unsecured Loans

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