Secured loan: meaning, work and difference with other loans

Know the meaning and working process of secured loan and how it is different from other loans.

Representative picture

Loans are divided into two groups: unsecured and secured. Unsecured loans are granted based on the creditworthiness of the borrower and are generally granted to those with excellent credit ratings.

Unsecured loans can be a revolving loan product with a credit limit, such as a credit card or a term loan, in which the borrower receives a lump sum payment and repays it in monthly EMIs until the end of the term .

A personal loan is a common type of unsecured loan that can be used for a variety of purposes and has no restrictions on how it is used.

They can also be used for specialized purposes such as weddings, education, travel and emergencies, as well as a debt consolidation loan to pay off current unsecured debt commitments.

WHAT IS A SECURED LOAN:

A secured loan is a secured loan in which the borrower can secure a loan by pledging any asset. The amount of the loan is determined by the value of the collateral. Since the lender is able to liquidate the asset if the borrower defaults, this type of loan is largely risk-free for the lender. As a result, borrowers will be able to obtain a larger loan amount with a reduced interest rate.

LIST OF ASSETS THAT CAN BE USED AS COLLATERAL:

  • Privately owned vehicles
  • Property, both commercial and residential
  • Equipment and machinery
  • Fixed deposits, bonds, mutual funds, stocks, and ESOPs are examples of investments.
  • Insurance policies
  • Collectibles and Valuables
  • Customers who owe you money in the future are receivables.

DIFFERENCE BETWEEN SECURED AND UNSECURED LOANS:

  • The most important distinction between a secured loan and an unsecured loan is the collateral that must be provided in order to obtain the loan. A secured loan requires you to provide the lender with an asset that will act as collateral for the loan. A secured loan requires you to offer an asset as collateral, unlike an unsecured loan.
  • The interest rate is another important distinction between a secured loan and an unsecured loan. Compared to an unsecured loan, secured loans normally offer a lower interest rate. This is because lenders perceive unsecured loans to be riskier than secured loans.
  • Secured loans are easier to obtain. However, unsecured loans are more difficult because a banker is less likely to issue a secured loan.
  • Unlike unsecured loans, secured loans normally have longer repayment schedules. Secured loans, in general, offer borrowers a more favorable deal than unsecured loans.
  • Secured loans are easier to obtain because they are less dangerous for a lender to provide, but unsecured loans are more difficult to obtain.