Kenya’s finance sector offers a lot of loan products. Secured loans are those that have collateral—an asset the debtor promises as collateral for the loan—as its backing. If the borrower defaults on the loan, the lender may seize the security to recover their losses. Collateral acts as an assurance that the loan will be returned.
Some common examples of collateral include:
- Property, such as a house or a car
- Savings accounts
- Stocks and bonds
- Jewelry or other valuable assets
Because the loan is secured by collateral, lenders are generally more willing to approve secured loans and may offer lower interest rates than they would for unsecured loans. This is because the lender has a form of security in case the borrower defaults on the loan.
Examples of secured loans include:
- Mortgage loans: where the collateral is the property being purchased
- Auto loans: where the collateral is the vehicle being purchased
- Home equity loans: where the collateral is the borrower’s home equity
- Personal loans: where the collateral is the borrower’s savings account or other assets
Secured loans can be a good option for borrowers who may not qualify for an unsecured loan or who want to take advantage of lower interest rates. However, it’s important to remember that if the borrower defaults on the loan, the lender can seize the collateral, which can have serious financial consequences.
Types of secured loans
Here are some common types of secured loans:
- Mortgage loans: Mortgage loans are secured by the property being purchased. The lender holds the title to the property until the loan is repaid in full. This type of loan is commonly used to purchase a house or a piece of real estate. The interest rates on a mortgage loan are usually lower than unsecured loans as the property serves as collateral.
- Auto loans: Vehicles are used as collateral for auto loans. The lender holds the title to the car until the loan is fully repaid. This type of loan is commonly used to purchase a car or other vehicle. The interest rates on auto loans are usually lower than unsecured loans as the vehicle serves as collateral.
- Home equity loans: The borrower’s equity in their house serves as collateral for home equity loans. Equity is the amount that separates the home’s market worth from the total of its outstanding mortgages. This type of loan is commonly used to make home improvements, pay off debts or finance a large purchase. As the home serves as collateral, interest rates are lower than unsecured loans.
- Personal loans: Personal loans can be secured or unsecured; some personal loans are protected by a savings account or other assets that the borrower promises as collateral for the loan. Due to the assets or funds serving as security, secured personal loans often have lower interest rates than unsecured loans.
- Pawnbroker loans: Personal belongings that the borrower promises as collateral for pawnbroker loans, such as jewelry or electronics, serve as the security for the loans. Until the loan is fully returned, the pawnbroker retains ownership of the item. People in need of quick cash frequently utilize this sort of loan, although the interest rates are greater than those of other secured loans.
It’s important to remember that if the borrower defaults on the loan, the lender can seize the collateral, which can have serious financial consequences. It’s important to evaluate the terms of the loan, the interest rate, and the possibility of losing the collateral before taking on a secured loan.
How Secure loans work
Here’s a step-by-step explanation of how secured loans work:
- Application: The borrower applies for a secured loan, providing information about their income, assets, and credit history. The lender uses this information to assess the borrower’s creditworthiness and ability to repay the loan.
- Collateral: The lender requires the borrower to pledge collateral as security for the loan. The type of collateral required will depend on the loan, for example, a mortgage loan requires a property as collateral, and an auto loan requires a vehicle as collateral.
- Approval: A loan agreement outlining the terms and circumstances of the loan, including the interest rate, payback duration, and fees, will be given to the borrower if the lender authorizes the loan.
- Disbursement: Once the loan agreement is signed, the lender will disburse the loan funds to the borrower. In the case of a mortgage or auto loan, the funds will typically be disbursed to the seller or the dealership.
- Repayment: The borrower is responsible for repaying the loan according to the terms and conditions agreed upon in the loan agreement. This typically includes making regular payments, which include principal and interest, until the loan is fully repaid.
- Collateral release: Once the loan is fully repaid, the lender will release the lien on the collateral and return the title of the property or vehicle to the borrower.
How to Apply for a Secured loan
Getting a secured loan involves a few steps:
- Determine the type of loan you need: Different types of secured loans are available for different purposes, such as buying a home, purchasing a car, or consolidating debt.
- Gather necessary documents: Before applying for a secured loan, you will need to gather the necessary documents, such as proof of income, bank statements, and proof of ownership of the collateral.
- Compare interest rates from different lenders: Banks, credit unions, and other financial organizations sometimes provide secured loans. It’s important to shop around and compare interest rates and terms before applying for a loan.
- Submit a loan application: Once you’ve found a lender and determined the loan that best suits your needs, you can submit a loan application. The lender will review your credit history, income, and other information to determine your creditworthiness and ability to repay the loan.
- Provide collateral: If your loan application is approved, the lender will require you to provide the collateral agreed upon. The lender will hold the title or a lien on the collateral until the loan is repaid in full.
- Sign the loan agreement and receive funds: Once the collateral is provided, you will need to sign the loan agreement and receive the funds from the lender.
- Repay the loan: You will need to make regular payments on the loan until it’s fully repaid. It’s important to stay current on payments, as defaulting on a secured loan can result in the lender seizing the collateral.
Remember to always read and understand the loan agreement, interest rate, fees, and terms and conditions before signing. It’s also important to remember that a secured loan carries the risk of losing the collateral if the borrower defaults on the loan.