When we talk about the broad categorisation of loans, there are two major types: Secured and Unsecured. Of the two, secured loans are a more reliable and safer way of getting a loan. This write-up will shed some light on the secured loans aspect.
What Are Secured Loans?
Secured loans are issued after keeping an asset in the form of collateral. To put it in simple words, a loan is advanced in exchange for an asset that the borrower owns, and in case the borrower defaults, the asset is used to recover the loan amount. This type of activity comes under the domain of secured loans. It means that if a person wants to avail for a secured loan, then they have to handover assets like financial documents, insurance policy, stocks, etc. as a security to the bank or institute. This is necessary because if the borrower defaults on repayment, then the loan amount can be recovered from that security.
Types Of Secured Loans:
There are different types of secured loans that the borrower can avail, depending on the needs and requirements:
- Mortgage Loan
A mortgage loan is advanced against a fixed asset like real estate or commercial property as a security to the lender. The lender gets to keep the property in its possession until the entire loan amount is repaid. Money lenders like Maryland Mortgage Lenders and other financial institutions provide such mortgage loans so that people can get funds in exchange for an asset that they own.
- Car loans
People require financial aid to get hold of a vehicle, and for that, car/automobile loans are available Similar to home loans, the possession of the vehicle is kept as collateral and is retransferred to the actual owner when the entire loan amount is repaid.
- Home loans:
The most common type of secured loan is a home loan, and people give possession of the house itself as collateral and avail a loan against it. The eligibility criteria require the borrower to pass the age criteria, have a stable source of income, and possess a few other financial documents to get a home loan quickly.
- Secured credit cards
Secured credit card loans require the borrower to deposit a certain amount of money in cash as collateral. People generally use this to improve their credit scores and creditworthiness. The credit card limit will depend on the amount paid as collateral.
Benefits Of Secured Loans.
There are multiple benefits to avail a secured loan. Some of them are listed below:
- Large Amounts Can Be Secured
Secured loans can be used by borrowers when their financial needs are high. Since an asset is kept as a security against the loan amount, the lenders do not hesitate to advance sizable loans to the borrower.
- Interest Rates Are Not Exorbitant
The interest rates in secured loans are generally low because the risk factor is less in secured loans due to the fact that the loan is backed by collateral.
- Improves The Credit Score
Secured loans not only give financial assistance but also give a chance to the borrower to improve their credit score. People with low and substandard credit scores are provided secured loans because there is little risk of default (as it is backed by collateral). The long repayment terms also make it easier for the borrower to repay the amount, which improves the borrower’s creditworthiness.
- Long Term Repayment
The borrower has a longer repayment tenure when availing for a secured loan because the amount is generally high. A longer repayment tenure eases the burden for the borrower to pay the installments.
Drawbacks Of Secured Loans:
Apart from the advantages secured loans offer, it also has certain drawbacks and limitations.
- More Burdensome
With long repayment tenure, the borrower needs to arrange for liquidity at regular intervals to ensure that the installments are paid promptly. This adds up to an extra burden on the borrower.
- Risk Of Asset Loss
In case the borrower fails to repay the loan amount within the decided time duration, there are high chances that the borrower may lose possession of the security that is being kept as collateral to recover the amount.
- Additional Overall Costs
Since the loan repayment duration is longer, the overall costs incurred by the borrower is high. When the loan lasts for a longer duration, the interest rate will compound with each installment, so even though the interest rates are low, due to the long-term instalment structure, the additional money that has to be paid increases.
So, in conclusion, secured loans are bliss for borrowers who have a low credit score or need a large sum of money, but it also requires the borrower to make an informed decision before applying for the loan.