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

ready | Warranty | bank loans

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.

Watch the video

Dear reader,

Business Standard has always endeavored to provide up-to-date information and commentary on developments that matter to you and that have wider political and economic implications for the country and the world. Your constant encouragement and feedback on how to improve our offering has only strengthened our resolve and commitment to these ideals. Even in these challenging times stemming from Covid-19, we remain committed to keeping you informed and updated with credible news, authoritative opinions and incisive commentary on relevant topical issues.
However, we have a request.

As we battle the economic impact of the pandemic, we need your support even more so that we can continue to bring you more great content. Our subscription model has received an encouraging response from many of you who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of bringing you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism we are committed to.

Support quality journalism and subscribe to Business Standard.

digital editor

First published: Fri, March 25, 2022. 08:45 IST

Comments are closed.