Secured loans pose lower credit risk to the lenders and hence, they are able to offer relaxed eligibility criteria to borrowers. They also come with lower interest rates and better repayment terms compared to unsecured loans like personal loans.
There are various loan types available in the market. Borrowers can apply for loans based on their end requirement. There are both secured and unsecured loans and your loan eligibility depends on various factors like your credit score, monthly income, existing loans and liabilities, and a few other factors.
Unsecured loans, like personal loans or credit cards, don’t need any collateral or security. They are processed in less time but come at high-interest rates and processing fees. This is due to the higher credit risk they pose to the lenders.
On the other hand, secured loans are seen as lower risk loans and give more leniency to the lender in fixing your interest rate, repayment tenure and other terms. Credit score gets lesser importance in a secured loan as against unsecured loans.
Which secured loan is the best when I need immediate cash?
- Gold Loan
Gold loans are one of the quickest to get. Since they are issued against the gold jewellery you pledge, there is not much documentation or lengthy application process to get this loan. The LTV ratio is also pretty high. Banks & NBFCs offer up to 80% of the gold value as the loan amount.
The interest rate is also pretty competitive at 7.5% – 12% per annum. If you have any gold lying idle at home or in bank lockers, a gold loan is the best option to arrange funds for your needs. They are cheaper, quicker and convenient.
- Loan against Property or Vehicles
If you have any kind of property, residential or commercial, or any car, you can get a loan against them. Properties and cars can get you a good loan to value ratio. Banks and NBFCs give up to 150% of the market value of the car as the loan amount. This percentage differs among banks. While Axis Bank gives 50% of the car value as a loan, HDFC Bank gives up to 150% of the car value as a loan. The loan amount when you mortgage your house is much higher. The interest rate ranges between 12% – 16% in the current market, which is closer to personal loans. So, a loan against property or car is a good option if you are in need of a high loan amount. For simpler loan amounts you can just go for a personal loan.
- Loan against Securities such as Mutual Funds/ Shares/ Bonds/ Insurance Policies/ FDs
It is also a good idea to get a loan against your investments, like mutual funds, shares, government bonds or bank FDs. You can even pledge insurance policies to get loans. Most financial institutions give you loans of up to 90% of the investment value.
These investment documents are considered highly secure and hence pose a low credit risk to the lender. The interest rate ranges between 10% – 13%, which is good compared to a personal loan. But you cannot get a loan over and above the investment value. So, if you are looking for smaller loan amounts, this is a good option. Your post office NSC Certificate or KVP certificates can be pledged to get loans too.
- Top-up Home Loan
If you are an existing home loan customer, a top-up home loan can come in handy during emergencies. Top-up home loans require lesser documentation since the bank already has all the necessary documents. The loan is sanctioned based on your repayment history and your current relationship with the bank. It also depends on how much loan outstanding you have on your current home loan and the current market value of the property.
The interest rate is just a few percentages above the existing rate on your home loan, so it is quite economical. The process is also quite simple and the turnaround time on the loan sanction is quick. This is a good option for existing home loan customers since they can avoid a complicated loan application process.
Points to Remember while Choosing Secured Loans
Secured loans can be a very appealing borrowing option if you choose the right one for your needs. If you need a large sum of money, you can use a high-value asset such as your home or a life insurance policy to get a combined loan at a lower rate. And, never use a high-value asset as leverage for a low-value loan.
The borrower is expected to maintain mark to market margin on loans against securities, and failure to do so may result in the lender liquidating the collateral. When the market is unpredictable, investors should avoid taking out large loans on assets like stocks and mutual funds. Furthermore, instead of pledging your successful mutual fund assets as loan security, it may be a better option to liquidate them to meet your fund requirements.
Another important point is to have a detailed repayment plan in place before applying for any secured loan, as defaults could result in the loss of a valuable asset. Imagine the long term consequences it could have on your future finances when you pledge important collaterals, like your life insurance policy, land, or household gold to secure the loan. Finally, shop around before you settle on a loan. You should compare your options, including pre-approved unsecured loans, and factor in other fees such as processing fees and prepayment penalties.
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