A secured loan is a type of loan that allows an individual to borrow an amount from a lender using assets as collateral. This type of loan allows a person to borrow a bigger sum of money they may need to apply for on a more major scale; generally, these lenders lend to borrowers with valuable things. In this article, you’ll learn how secured loans work in Malaysia, the types of loans available, and the benefits and risks to consider for yourself as well.
Definition of a Secured Loan
A secured loan is money provided by a lender to a borrower in exchange for an asset that the lender can take if the loan is not paid back. Items placed as collateral are often property and vehicles but may include products of value. Secured loans differ from unsecured loans where no pledged assets must be provided. An example of a secured loan would be a mortgage loan where the property being bought is the collateral.
Types of Secured Loans Offered in Malaysia
In Malaysia, there are several categories of secured loans available to borrowers. Some of the primary ones include:
- Home Loan - A loan taken to purchase a house or property, with the purchased property serving as collateral to the bank or lender.
- Car Loan – This is a loan taken out to buy a car in which the car serves as collateral for the bank.
- Secured Personal loan – A loan availed of by an individual for which a bank/ moneylender gives loan in exchange for the pledge of an asset like fixed deposit, gold, etc.
- Business Loan – For business purposes, borrowers can provide business property or assets as collateral to secure funding.
How Secured Loans Work
Secured loans work when a lender gives money to a borrower on the provision that they put up something of value as collateral if they don’t pay it back, thus safeguarding their loan. Here’s how it works:
- Loan Application: Most lenders require you to fill out a loan application, in which you detail your finances as well as the worth of the items you want to pledge.
- Evaluation of Collateral by the Bank: The bank will evaluate the value of the collateralised asset. If the asset is worth the loan amount or more, your application will be approved. If not, the bank can decline your application or ask for more 'security'.
- Document Preparation: The borrower is required to supply documents proving that they own the asset being pledged as collateral, and financial documents proving that they can repay the loan.
Loan Application Process
For a secured loan, the borrower will need to fill in an application form provided by the bank or lender. This could include full personal and financial details and some form of supporting documentation, such as income proof, bank statements, and copies of documents showing ownership of the asset to be pledged.
Collateral Assessment by the Bank
The bank or lender will assess the collateral that you are pledging. For example, if you are pledging your home, the bank will assess the market value of the home. That way they know how much to lend you. You may want to pledge lower total value assets so the bank is forced to lend you less.
Benefits of Secured Loans
Secured loans have a number of benefits when compared to unsecured loans including:
- Lower Interest Rates: As there is less risk for the lender, secured loans are normally charged at lower interest rates than unsecured loans.
- Larger Loan Amounts: Secured loans can offer larger loan amounts because they depend on the value of the pledged assets.
- Easier Loan Qualification: Borrowers who may not qualify for unsecured loans can obtain secured loans because they provide assets as collateral.
Secured loans also can provide immediate capital. If you recommend money immediately, you may wish to investigate an immediate cash loan from Amanahkredit. Aside from being a straightforward and fast process, Amanahkredit permits cash loans up to RM5000 using its online eligibility application. You can anticipate cash in your hand in a brief time.
Risks Involved in Secured Loans
Although secured loans have many advantages, they also carry risks that need to be considered. The main risks include:
- Loss of Assets: If a borrower defaults on a loan, the lender may seize the asset used as collateral.
- Devaluation of assets: If the value of the collateral drops during the loan period, it exposes the borrower to a bigger loss.
- Extra costs: Where a borrower fails to repay, the borrower may incur additional costs such as fines etc.
Comparison of Secured vs Unsecured Loans
There are advantages and disadvantages to both secured and unsecured loans. Here’s how they compare:
- Interest rate - Secured loans tend to have lower interest rates because there’s less risk for the lender.
- Amounts you can borrow - With secured loans, you’re often able to borrow more.
- Collateral - You need to offer collateral for secured loans, while with unsecured loans you don’t need to.
- Risk: Secured loans carry a higher risk for the borrower, as failure to repay the loan can lead to the loss of assets.
Who Should Apply for a Secured Loan?
Secured loans are useful for people or companies who require extra money and have something of value to provide. They may be a better match for those who have a poor credit rating or who wouldn’t qualify for an unsecured loan.
Ways to Avoid Problems With Secured Loans
If you are to avoid problems applying for a secured loan you should take certain steps:
- Know your ability to pay the money back, within the period stated.
- Choose the Right Collateral: Select a high-value asset that can be sold easily if the bank needs to recover a loan, such as property.
- Understand Loan Terms: Make sure you understand the loan terms completely.
By following these steps, you can minimize the risks and ensure that the secured loan works well to meet your financial needs.