Secured loans are those that are backed by collaterals either in physical assets, financial assets or anything else deemed valuable by the financial institution one is looking to borrow from.
Secured loans are considered as safe bets for the bank and thus, usually much easier to secure. The banks or other financial institutions always have the asset to fall back upon if a borrower fails to repay off the loan. The lender can liquidate the collateral to recover the money owed.
Unsecured loans usually charge a fixed rate of interest - whether term loan or revolving loan. Secured loans offer a consumer the choice between a fixed or a floating rate of interest. A more detailed list of differences in their characteristics are as follows:
|Features||Secured Loans||Unsecured Loans|
|Interest rates||More affordable||Higher than secured loans|
|Loan Amount||As much as 100% of the value of the collateral||A 2 to 4 times of your annual salary/income.|
|Credit rating||Doesn’t need to be perfect||Needs to be good|
|Loan Tenure||Longer||Shorter (1-7 years)|
|Monthly repayment amount||Lower||Higher|
|In event of default||Lenders can sell the collateral to recollect the debt||Recourse are limited|
|Processing Period||Shorter as risk is low||Longer as a lot of verification needs to be done|
• Above 21 years old
• No minimum income requirement
• Between 21 and 65 years
• Minimum income requirement varying from bank to bank
Lombard Lending - This is a type of secured loan that is usually restricted to affluent borrowers. These type of loans allow for the collateral to be anything from vintage cars to antiques to expensive wines, basically anything of high value. The banks use appraisers, of course, to ascertain the collateral value before approving the loan.
A secured overdraft is similar to secured loans in that in both the cases the borrower has to pledge their asset to the bank as collateral. However, the type of assets pledged and the repayment structure are different in both cases. In case of a secured overdraft, the acceptable assets can include bank deposits, shares or physical property.
If the borrower is unable to repay their debt, the banks have every right to sell their assets pledged at the time of getting the loan, to recover the money owed by the borrower. The borrower is liable for any difference in the amount borrowed and the amount recovered if the proceeds are not enough to cover the entire debt.
Secured overdraft can be taken against the following collaterals.
Below is a comparison of the main characteristics of secured overdraft and secured loans:
|Tenure of Loan||Short-term revolving||Fixed Term|
|Interest Rate||Usually greater than term loan||Usually lesser than overdraft|
|Type of Interest rate||Variable, pegged to prime rates||Variable, pegged to prime rates|
|Are loans recallable on demand?||Yes||No|
|Partial drawing of loan permissible after repaying partial amount||Yes||No|
There are a few things which you need to consider before getting a secured loan:
Secured loans are different from unsecured loans in the fact that you need to provide a collateral. But the bank considers a number of points before accepting that collateral and granting the loan. Some of them are:
There are consequences to defaulting on a loan, even if it’s secured. These include: