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23 Apr

Why Should You Choose A Secured Loan?

  • By Editorial Team
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In the word of banking it is important to note that a good credit score is critical, especially for SMEs because that’s what gets you the loan approvals. So, if you are low on finance that you need in order to give a giant push to your dreams, here’s a bit about secured loans.

What is a Secured Loan?

Secured loans are the loans which are backed by collateral. It’s the lender’s way of saying, “I trust you but what if you fail to return our money on time.” And so, you put something of value as a guarantee. It can be anything from a property to anything valuable, which the lender can sell to recover his money, in case you do not repay the loan.

So, why are these loans more popular? Well, simply because of higher borrowing limits, lower interest rates and extended repayment period, all thanks to the collateral, whose fate hangs in balance. On contrary, in an unsecured loan like personal loans and student loans, no collateral is involved and so the lender is at a risk. Thus, he levies a higher interest rate and offers a low borrowing limit. You must have a good credit history and a steady source of high income to get an unsecured loan approved.

Types of secured loans

  1. Loan Against Property / Mortgage 
    Mortgage requires you to put your home or real estate property at stake and obviously, you wouldn’t want to lose your home. Sometimes, insecurity can be a good motivator! Similarly, in car or equipment loans, the object you are buying with the loan, itself becomes the collateral.

  2. Term Loan 
    It has to be repaid in regular payments over a period of time with interest rates not being a constant.

  3. Working Capital Loan
    It is not used to buy assets or make investments. It helps in day-to-day functioning by taking care of accounts payable, wages, etc.

  4. Bill / Invoice Discounting
    What happens when your customers delay the payment? It can hinder you from taking new orders. To overcome this, businessmen opt for bill or invoice discounting options. It is a loan given against the money that is expected to come in near future but charging a fee for it.

  5. Supply Chain Finance
    This is way of optimizing the cash flow. The supplier sells his invoices to a bank at a discount as soon as the buyer agrees to buy it.  Now the bank deals with the buyer, who gets more time while the supplier gets the money quickly.

  6. Machinery Loan

Machinery loan is provided mostly to small and medium enterprises for purchase of new machinery which is essential for smooth conduct of its business. It can also be taken to maintain or repair the existing machinery.

  1. New or Pre-Owned Car Loan: Car, being the collateral here, the lender makes an evaluation of the car and offers the loan accordingly. The borrower can then pay off in instalments. In some cases, the buyer has to make a down payment. Any default on the payments, the bank has the right to repossess the car.

  2. Two wheeler Loan: A secured two wheeler loan has a lower rate of interest compared to an unsecured loan - reason being the loan is secured usually against the vehicle.

  3. Medical Equipment Finance: Whether you are planning to start a healthcare facility or enhance your existing one, then look no further. Go for Medical Equipment Finance which will help you to buy equipment with the latest technology. No need to use any property as security as equipment itself can be a collateral.

Popular Collateral or Assets Types

  1. Real Estate or Property: A property as collateral gives a certain assurance of repayment; this helps to lowers the interest rate because in case you fail to pay your debts, the lender gets a home to sell. The interest rates get lower with good credit scores as well.

  2. Invoices: As discussed above, lender pays you as you wait for your payment, which lender can collect on your behalf.   

  3. Savings / Fixed Deposits: Lenders offer savings-secured or certificate secured loans to its customers. Your savings become your collateral and if the lender is generous enough, you even earn interest on it.

  4. Inventory: One can get an asset-based lending - it happens in cases where a big contract is in hand but rolling it off requires money. Slightly tricky how it pans out, but lenders use the purchase order/ contract as the collateral.

  5. Blanket Liens: It means everything that you own can be seized by the lender in case you default.

Advantages of Secured Loans

  1. Low Interest Rates: The greatest plus point of a secured loan is the low interest rates. This is because the lender takes less risk as your home or real estate property is secured against the loan. In case of a default, the collateral can be seized.

  1. High Loan Amount: Low interest rate and high loan amount. What more can you ask for? Lenders have no qualms in disbursing large amounts of loan as it's easy to recover the loan if required.

  2. Long tenure: In case of secured loans, borrowers have the advantage of time to repay the loan amount. The repayment period is often longer.

  3. Simpler terms: Not much of a hassle to get a secured loan. It's easy to get it approved as the loan is always backed by a collateral. Your credit rating may not be perfect but still you will get a loan, albeit at a higher rate of interest.

  4. Low EMI: The loan tenure being longer, the EMI becomes less. Beneficial for those who cannot afford to pay high EMIs.
     

Summary

To sum it up, if you’re already struggling to pay your existing debts, never go for secured loans. You may end up losing what you have. But if you are a good borrower with high credit score or want a higher score, secured loans are for you!

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Did You Know

Loan Eligibility

Loan eligibility is a standardised criterion that lenders use to assess the credit worthiness and applicable rate of interest for a borrower. It is used to determine if a borrower can be offered a particular loan or not. It is based on several parameters like age, age of retirement, employment status, income, current loan obligations, credit rating and others.

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