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A secured loan is provided by banks and other lending institutions to individuals against an asset they own as collateral, required for any contingencies or to fulfill financial obligations. Interest rate on such loans may be lower by several percent when the EMI begins as compared to unsecured loans.
An individual who owns the asset with a good repayment record of past loans over and above the basic eligibility criteria can apply for secured loans. It may sound attractive at first, however, borrowers who pledge their asset as collateral to obtain secured loans should know that in case you default on EMI repayments for a longer period, or failed to reply to bank’s notices, and are unable to repay at all, the lending institution may seize your asset and settle the claim at the court.
A declaration agreement may be signed between the lender and a borrower on loans taken for higher value, depending upon the type of asset kept as collateral. Banks and NBFCs have to strictly follow the loans and advances guidelines as notified by the Reserve Bank of India (RBI) to disburse secured loans to eligible individuals.
Here is a guide to walk you through various types of secured loans, how they work, and eligibility to get one.
Types of secured loans are assets that are acceptable by banks and authorized lending institutions to provide collateral loans to individuals. Each secured loan comes with unique features such as lending rate, margin over and above the submission of proof, documents, and legal papers pertaining to the asset.
Here are the popular assets which individuals can use to obtain secured loans, as follows:
Loans against gold jewelry are provided by lending institutions, including banks and NBFCs, to individuals and businesses to meet financial obligations. Gold loans are provided up to 75% LTV ratio depending on the purity, weight, and its current value in the market. It may not be profitable if you decide to sell your gold jewelry and ornaments in an emergency.
Gold loan interest rate
RoI on gold loan is calculated on a gold loan when the equated monthly installment (EMI) begins. However, gold loans have lower interest rates than other retail loans because of its security value.
Tenure
Gold loan is a short-term loan given to borrowers for a period starting to maximum 3 years.
Type of payments on gold loan
EMI-based
Overdraft
Bullet repayment
How to apply for gold loan
Authorized banks, NBFC, and retailers from where the gold was bought offer to buy gold from consumers. One may as well compare the lending rates, LTV ratio and choose financial lenders as per their requirements.
Online procedure to apply for gold loans:
Consumers can also approach lenders at their stores or office, and take the jewelry along with proper receipts. The lenders may ask you to submit the documents as mentioned above for proof or address, income, and identification. The lenders will then grant the loan on the basis of gold purity check, market price, over and above basic eligibility criteria.
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A term deposit, also known as time deposit, are accounts where interest can be earned on the principal amount for a specified tenure. Such deposits are ideal to meet mid-term financial goals as it provides higher returns than savings accounts. Investments can be made either on a recurring basis (recurring deposit), or in a lump sum (fixed deposit).
Loan amount
Depending on banks, such loans range from INR 5,000 up to 95% against the term deposit value in your account.
Interest rate
Lending institutions charge interest when the equated monthly installments (EMIs) begin. Usually, banks charge 1% RoI above the relative time deposit rate. Other charges may include, processing fee, prepayment penalties, etc.
How to apply
The online process of getting loans against term loans involves logging into your online banking account and submitting a request with the concerned bank. Since such loans are provided by the bank managing your term loans, you may not be required to submit documents but just a loan request against your security, and the application may be processed online with the loan amount deposited in your savings account.
In the offline process, however, the agent will help you file for loan application after verification of your documents and form submission.
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Individuals can own a share or equity shares of a company and as the company grows, its value increases over time. Shares can be bought by investors and are traded on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Profits of the shares are shared with investors in the form of dividends.
Bonds are low-risk fixed-income instruments where interest can be earned at the time of maturity. In India, there are different types of bonds for investors to invest including government securities bonds, corporate bonds, inflation-linked bonds, zero coupon bonds, as well as sovereign gold bonds (SGBs).
In order to get loans against shares and bonds, banks obtain a declaration from the borrower, and are subject to approval as per bank’s lending policy. A few criterias are as follows:
Purpose of the Loan
To prevent contingencies and personal needs.
To buy new shares and bonds.
Loan amount
Physical form: Maximum: INR 10 lakh.
Dematerialized form: Maximum INR 20 lakh.
Margin
Physical form: Minimum 50% of the market value.
Dematerialized form: Minimum 25% of the market value.
How to apply
The process of filing an online application for loan against shares for existing consumers involves logging into the online banking website, selecting the option for loan against shares, and submitting an online application form, which asks for bank account proof, demat account proof, or demat holding statement.
The new consumers may have to request for a call back on your registered mobile number, or alternatively visit the bank branch with above documents along with proof of address, income, and identification.
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The security for a home loan involves submission of the property’s title deeds. In addition, banks may require guarantees from solvent guarantors, pledge of shares and bonds, term deposits, or even gold as collateral that are acceptable to the banks. Banks provide home loans up to 75% to 95% LTV ratio of the property’s value.
Rate of interest
Public and private sector banks provide home loans to individuals for buying a plot of land, constructing a house, or purchase constructed residences, refurbishment of existing ones, etc., and charge rate of interest (ROI) when the equated monthly installment (EMI) begins.
Maximum loan amount
Banks fund up to 77-90% LTV of the value of the property after eligibility evaluation.
Processing charges
This charge is levied by lenders to process your application, which ranges from 0.25% up to 2%. For the salaried and women borrowers, charges are usually lower.
Tax benefits
Tax deduction benefits can be availed as per Section 24, Section 80C, Section 80EE of the Income Tax Act.
How to apply
Depending on lending institutions, the facility may be available online for its existing consumers. Nonetheless, the process of filing for a loan application could be similar both online and offline. A proper scrutiny of documents is initiated by lenders after submission of loan application, along with documents required for proof of address and identification.
The individuals will have to mandatorily submit the proof of property ownership documents such as agreement copy, electricity bill, maintenance bill, municipal tax bill. If the property is being utilized for a business purpose, a tax audit report including form 3CA, 3CB, and 3CD, will have to be submitted on a case by case basis.
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