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Secured Loans - What You Must Know

When you take a loan to buy a house or a car, do you understand why you have to give the lender a security? This article will answer these questions for you and help you understand what is different about these types of loans.

What are secured loans?

A secured loan is a type of a loan where you give a "security" or collateral to the lender. For instance, when you buy a house or a car, you give the lender a right over the house or the car until you have fully paid the loan amount to the lender. By giving a security, the lender is protected in case you are unable to repay the loan.

How are secured loans different from unsecured loans?

• Collateral: The borrower is required to provide a collateral or security such as a house in case of secured loans. On the other hand, there is no collateral required in an unsecured loan.


• Rate of interest: Since you are required to put up a security to get the loan, the lender is somewhat protected. Therefore, secured loans charge a lower rate of interest than unsecured loans.


• Loan amount: By virtue of offering a security to the lender, you can often get a higher amount of loan than in an unsecured loan.


• Down payment: In case of a secured loan such as home or car loans, you will usually be required to pay some part of the purchase price through your own means. Usually this amount is a minimum of 10% of the purchase price. There is no such pre-requisite in an unsecured loan.

Can anyone get a secured loan?

Your ability to get a loan depends upon your loan repayment capacity. So, theoretically speaking, anyone can get a loan. However, as a practical matter it depends upon many subjective criteria. Sometimes, even when the loan has a collateral, you might be rejected. For instance, if you have a bad credit history the lender might refuse your application for a home loan.

What is the interest rate charged?

Different types of loans charge different rates of interest depending upon the purpose and the type of security that is put up.

Key tips to keep in mind

• Documentation: It is important to go through the paperwork carefully in any loan agreement. When you offer an asset as security to the lender you must understand your rights and the terms and conditions that might affect your access or ownership of the asset that you put up as security.


• Full ownership of the asset: Once the complete loan amount due is paid back to the bank, you will receive the full ownership of the asset that you offered as security for the loan.


• Track record of repayments: To avoid any disruption or administrative issues, pay your EMI on time. Otherwise, the security that you have given might be at risk.

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