Loan Against Assets – How Secured Loans Works

Most of the Investments are profitable only in long term. How ever we can use these Investments as mordgage for short term loand when need arises. People used to take personal loans when in need but Little do they realise that one can take loan against some Financila instruments like Gold, Property, Equity etc.

A loan against assets, also known as a secured loan, works by leveraging the borrower’s assets as collateral to secure the loan. Here’s how it generally works:

1. Collateral Requirement: The borrower pledges a valuable asset (such as property, vehicle, securities, etc.) as collateral to obtain the loan. The value of the asset typically determines the maximum amount that can be borrowed.
2. Loan Approval: The lender assesses the value and condition of the asset offered as collateral. Based on this evaluation, the lender determines the loan amount, interest rate, and other terms.
3. Terms and Conditions: The terms of the loan, including the interest rate, repayment schedule, and tenure, are agreed upon by the borrower and the lender. These terms may vary depending on factors such as the value and type of collateral, borrower’s creditworthiness, and local regulations.
4. Risk Management: Secured loans are considered less risky for lenders because they have the right to seize the collateral if the borrower fails to repay the loan according to the agreed terms. This reduces the lender’s risk of financial loss compared to unsecured loans.
5. Asset Evaluation: The value of the collateral may be periodically reassessed to ensure it still covers the loan amount in case of default. This can affect the availability of additional credit against the same asset.
6. Repayment: The borrower makes regular repayments according to the agreed schedule. Failure to repay may result in the lender seizing and selling the collateral to recover the outstanding amount.
7. Legal Implications: In case of default, the lender follows legal procedures to take possession of the collateral. The borrower may lose the asset if they cannot repay the loan as per the terms.

Advantages of Loan Against Assets:

• Higher Loan Amounts: Secured loans typically allow borrowers to access larger amounts of money compared to unsecured loans.
• Lower Interest Rates: Due to the reduced risk for the lender, secured loans often come with lower interest rates than unsecured loans.
• Improved Credit Access: Individuals with lower credit scores or limited credit history may find it easier to qualify for a secured loan since the collateral mitigates the risk for the lender.
• Flexible Repayment Terms: Secured loans may offer more flexible terms and longer repayment periods compared to unsecured loans.

Considerations for Borrowers:

• Risk of Losing Assets: Defaulting on a secured loan can result in losing the asset pledged as collateral.
• Asset Valuation: The loan amount may be restricted by the value of the collateral, which could limit borrowing capacity.
• Interest Rates and Fees: While generally lower than unsecured loans, interest rates and fees associated with secured loans can vary, so it’s essential to compare offers.

Loan against Gold

As the name suggests, one can take loan against physical gold. As per the RBI rule, the loan to value (LTV) is maximum 75%. This means that if the value of your gold is Rs. 100, you are eligible for a loan of Rs. 75. The interest rate ranges from 12-17%. During an emergency, one can opt for gold loans, instead of applying for a personal loan with a bank.

Loan against Life Insurance Policy

A person can also take loan against his life insurance policy. An individual is eligible for a maximum loan of 85-90% of the surrender value. The interest rate ranges between 9-10%.

Loan against Fixed Deposit

One can also avail a loan against his fixed deposit. However, the minimum tenure of the loan is the term of fixed deposit. The maximum loan to value (LTV) is 90% of the deposit amount. The interest rate charged by banks is around 2-2.5% higher than interest paid on deposit by banks.

Loan against Residential Property

A loan against residential property can be availed too. The interest rate ranges between 11-15%, while the maximum tenure of the loan is generally 15 years. The loan to value is maximum 75% of the value of the property.

Loan against Shares

An individual can take loan against equity shares. The amount and tenure of the loan depends entirely on the banks. The interest rate for this type of loan ranges between 11-16%. The loan to value is a maximum of 50% of the value of the shares.