What is a secured loan?
The HDFC has so far sanctioned home loans worth Rs 2 trillion in FY22. But have you ever wondered what types of loans are offered by lenders and what are the inherent risks? Find out here
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Loans fall broadly into two categories. These are unsecured and secured loans. An unsecured loan is granted based on the creditworthiness of the borrower and is generally granted to those with high credit scores.
Unsecured loans can be a revolving loan product that contains a credit limit, like a credit card or a term loan, where a lump sum is paid to the borrower, who repays it in monthly EMIs until the end of term.
A popular form of unsecured loan is a personal loan which can be used for various purposes and has no restrictions on end use.
They can also be used for specific purposes such as marriage, education, travel, emergencies or a debt consolidation loan, which can be used to pay off existing unsecured debts.
On the other hand, in secured loans, the borrower is required to keep an asset as security or collateral to borrow money.
In simple terms, a collateral is an item of value that a lender can seize from a borrower if he fails to repay a loan according to agreed terms.
A common example is mortgage loans. Normally, the lender will ask you to provide your home as collateral.
This means that if you fail to meet the repayment terms of your mortgage, the bank has the right to take possession of your home. The bank can then sell your house in order to recover the money it lent you.
Assets that can be used as collateral include vehicles, property, gold, fixed deposits, investments, insurance policies, machinery, and receivables.
A securities loan can also be obtained by pledging stocks, mutual fund units and bonds. While a property loan can be used for personal or business purposes by pledging residential and commercial properties.
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First published: Fri, March 25, 2022. 08:45 IST