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Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren’t sufficient to qualify for an unsecured loan. Secured loans may allow borrowers to enjoy lower interest rates, as they present a lower risk to lenders. However, certain types of secured loans—including bad credit personal loans and short-term installment loans—can carry higher interest rates.

What is the purpose of having secured loans in the market?

When there are unsecured loans readily available, why would a person chose to take up a secured loan? There are two primary reasons, from the point of view of the lender and the customer.

Lenders are relieved of some of the potential financial burden and loss that they could incur as a result of default on payments.

Borrowers are eligible for higher loan amounts that are given on more favourable terms and lower interest rates as they have pledged an asset as collateral.

What are the types of secured loans, and the collateral required?
  • Mortgage Loans are secured loans that pledge property as collateral
  • Nonrecourse loans
  • Car loans
  • Home loans

Most secured loans (home loans, car loans, business loans to purchase large assets) are sanctioned against a repossession clause, which should generally work for the benefit of the borrower, but more often than not, works in favour of the bank.

Features of secured loans
  • Loans are given against the title of ownership of assets, which will be used as collateral (like homes, vehicles, assets, property).
  • Lower interest rates as compared to unsecured loans, because the bank has a higher level of confidence in your ability to repay.
  • More flexible repayment options than regular loans.
  • Option of fixed rate and variable rate.
  • Loan approval is faster.
  • Customizable loans to cater to specific needs.
  • These loans are available to non-salaried individuals.
  • There is no need for a guarantor for these types of loans.
  • Banks and lenders can repossess assets for which loans were taken.
  • Improves CIBIL score once secured loan has been repaid in full. More favourable than unsecured loans.
Eligibility criteria

You must meet the following requirements to be eligible for a secured loan:

  • Applicants must have reached the age of 18 years or older.
  • Applicant must be a resident of India.
  • Most banks and lenders require the applicant to have a minimum annual income of Rs.3 lakh per annum.
  • Income can be generated from regular salary, non-salaried income and business income.
  • For loans based on business income, the business must have been running and generating a profit for the last 3 years.
  • Applicant must have assets, whose value must match or exceed value of loan required.
Documents required

You will, of course, need to submit a bunch of documents to the lender or bank, so that they can establish your identity, address, and other details. Documents you will require for different kinds of secured loans are:

Mortgage loan:
  • Proof of identity – This should be an official document which contains your name and photograph. Could be either your driving licence, passport, voter’s ID, PAN card, Employee ID (if the company is registered), etc.
  • Proof of age – Should be a verifiable document that determines your age, such as a birth certificate, passport, voter’s ID, etc.
  • Proof of income – This should be an official / certified document which contains the details of your income and tax paid (TDS). Could be either your salary slips for the past 3 months, or Form 16 duly filled in and attached to a salary certificate.
  • Proof of residence – This should also be a certified document that verifies your residential address in the eyes of the law. Could be either your phone / internet bill, rental agreement, bank account statement, etc.
  • Original property documents of the property that is being pledged as collateral against the loan.
  • Bank statements for the last 6 months.
  • Guarantor (optional).
  • Copy of lease agreement for LRD (Lease Rental Discounting).