Secured Personal Loan
The secured personal loans come with some form of collateral such as your home, car, or any asset of the borrower. It is secured for the lender to lend the amount to the borrower. Less risk is associated hence, the interest rate is also lower.
Features
- Higher Loan Amounts Sanctioned: As lenders have lower risk associated with unsecured loans, they offer higher amounts of loans to the borrowers.
- Collateral Required: Unlike unsecured personal loans, secured loans require collateral as they are secured for the lenders. If the borrowers default, then the collateral can be used to recover the loan amount.
- Low Interest Rates and Long Repayment Period: Here, as there is lower risk to the lenders, they offer lower interest rates and an extended repayment period. As the amount is huge, they allow borrowers to repay the amount in a longer duration.
Advantages
- Low Interest Rates and Huge Loan Amounts: Lower interest rates and higher loan amounts are a boon for the borrowers. Lenders feel lower risk and hence, they have the flexibility to offer lesser interest rates with huge loan amounts.
- Credit Score Improvement: Timely repayments of the loan amount, can significantly improve your credit score which will make it easier to apply for another loan if required. A good credit score signifies good borrowing behavior.
Disadvantages
- Risk of Losing Collateral: As secured loans have collaterals associated, being a borrower it is riskier to avail of this loan, you might lose your asset if you fail to repay your loan. Collaterals might include any asset such as a home, vehicle, jewelry, etc.
- Longer Approval Process: Compared to unsecured loans, the loan approval process is longer as the lender evaluates and verifies the collaterals.
Example
Suppose you wish to renovate your home and require a loan amount say (₹8 lakhs). You approach a lender who would pay you the amount but in return would require collateral. You agreed to use your car as the collateral which had a value worth ₹10 lakhs. The repayment period offered by the lender is say 7 years. You and the lender both agree to the terms and conditions, and you avail the loan for your home renovation.