What are Secured Loans - Features, Benefits, Interest Rates

With the plethora of loans available in the market today it is no surprise that most people are overwhelmed by the choices and may not choose the right loan.

While there are many different types of loans available, they are broadly classified into secured and unsecured loans. In this article, let us take a look at secured loans, their features and benefits.

What is a Secured Loan

A secured loan is a loan that requires collateral in order to be disbursed. Collateral or security can range from properties, gold, vehicles, etc. 

The presence of a collateral will ensure that the lender has something to fall back on in case you default on your loan. This also means that the interest rates will be lower for these loans as the risk is lower for the lender.

Features of Secured Loans

• A secured loan will only be disbursed if collateral is provided

• Interest rates are lower for secured loans due to the presence of security

• The repayment tenure is also much more longer and flexible

• Secured loans can be customized to meet specific needs of the borrower

Benefits of Secured Loans

• Repaying secured loans is a great way of building your credit score

• Secured loans enable you to spread the cost over time

• As they are less of a risk, lenders usually grant large amounts on secured loans

• Secured loans can be used for any purpose such as loan consolidation, home improvement and more

What is an Unsecured Loan

Unsecured loans have no assets as collateral for backing it. They are also known as signature loans as signature is all that is needed for the lender to grant the money to the borrower. Unsecured loans pose a higher risk to the lender, which is why they usually come with higher interest rates. 

Unsecured loans or unsecured personal loans are non-collateralized debt products offered by banks, credit unions, and online lenders. Student loans, personal loans, and revolving credit, such as credit cards, are examples of unsecured loans. To avail unsecured loans, the borrowers must have high credit scores to qualify for the best loan terms. 

Secured Loans vs Unsecured Loans

Secured debt is backed by collateral such as property whereas unsecured debt has no such backing. However, because of collateral attached to secured debt, the interest rates tend to be lower, loan limits higher and repayment terms longer.

On the other hand, unsecured debt, such as credit cards and personal loans, tends to carry much higher interest rates and shorter terms. Especially for borrowers with limited credit history or bad credit ratings, these rates can be even more restrictive.

Secured loans are a viable option for people with poor credit history or no credit history at all. They can also be a great fit if you’ve experienced financial hardship and are looking for ways to rebuild your credit. Responsible use of a secured loan can boost your credit score, allowing you to qualify for more favorable unsecured loans in the future.

Unsecured credit cards and small personal loans can be used to rebuild your credit, but you must be careful not to borrow more than you can pay back or rack up excessive amounts of debt.

What is Mudra Loan?

The MUDRA Loan is offered through the Pradhan Mantri Mudra Yojana (PMMY). MUDRA stands for Micro-Units Development and Refinance Agency. Borrowers can take business loans ranging from Rs.50,000 to Rs.10 lakh under the Sishu, Kishor and Tarun categories with this initiative.

MUDRA loan creates employment and benefits small enterprises, traders, vendors and more in generating income. Indian citizens who have business plans for service sector activities or trading and manufacturing activities can apply for Mudra loans. These may be taken from public sector banks, private sector banks, regional rural banks (RRBs), small finance banks (SFBs), and micro finance institutions (MFIs).

What is Collateral Security in Mudra Loan?

There is no collateral security required for a MUDRA loan. You can avail loans under MUDRA scheme from banks, finance institutions, and online lending platforms by passing the eligibility criteria and just submitting the necessary documents. The documents required are 

• Filled application form for the loan

• Proof of identity

• Proof of residence, and

• Passport size photographs

Any individual who runs a small business or MSMEs are eligible to apply for and avail a MUDRA loan.

What is A Loan Against Securities?

The loan against securities is a type of secured loan that involves pledging your shares, mutual funds, and life insurance policies as collateral for your loan. With the help of LAS, one can borrow funds against securities such as shares, mutual funds, insurance or bonds in order to meet current financial needs.Loan Against Security (LAS) is typically offered as an overdraft facility to your account after you have deposited your securities. 

You can use the LAS facility to draw money from your account, and you pay interest only on the LAS amount you use and for the period you use it. These loans are suitable for those who require instant liquidity for personal or business purposes and can repay it in a short time frame.