In times of financial need, leveraging your assets to secure a loan can be a smart move. While unsecured loans come with high interest rates and strict eligibility criteria, secured loans offer a more cost-effective alternative. Since these loans are backed by collateral, lenders face lower risk, allowing them to offer lower interest rates, longer repayment tenures, and higher loan amounts.

Secured Loans Can Serve Various Purposes

• Business Expansion & Working Capital – Entrepreneurs can use secured loans to fund business growth, purchase inventory, or manage cash flow without dipping into savings.
• Home Renovation & Repairs – Structural improvements, remodeling, or emergency repairs can be financed affordably through secured loans.
• Debt Consolidation – High-interest debt (such as credit cards or personal loans) can be consolidated at a lower cost.
• Medical Emergencies – Quick access to funds is crucial during a medical crisis, and secured loans often have faster approvals than unsecured loans.
• Education & Travel Expenses – Financing higher education or international travel is easier with secured loans, offering better terms than unsecured alternatives.

Because of these advantages, collateral loans on property and loans against life insurance are often more accessible and practical for individuals who may not meet the stringent income or credit score requirements of unsecured loans.

Both use collateral, but they cater to different financial needs. Let’s break down their features, benefits, and risks to help you make an informed decision.

Understanding Loan Against Property

A loan against property allows you to borrow money by pledging your residential, commercial, or industrial property as collateral. Various financial institutions provide collateral loans on property, including:

• Banks (SBI, HDFC Bank, ICICI Bank, Axis Bank, etc.)
• Housing Finance Companies (HDFC Ltd., LIC Housing Finance, PNB Housing Finance, etc.)
• Non-Banking Financial Companies (NBFCs) (Bajaj Finserv, Tata Capital, Muthoot Finance, etc.)

Loan Against Property Eligibility and Documentation Requirements

To qualify for a loan against property eligibility, you must have original property documents that can be verified by the lender. The property should be legally clear, free from major disputes, and registered in the name of the applicant. The key documentation includes:

• Title Deed: Establishing ownership of the property. The borrower's name must match the name on the property documents.
• Encumbrance Certificate: Ensuring there are no existing legal claims or loans against the property.
• Property Tax Receipts: Proof that the property is compliant with local taxation requirements.
• Approved Building Plan (for constructed properties): Verifying that the structure complies with local building regulations.
• Income Documents: Salary slips, ITR, business financials, etc., depending on whether the borrower is salaried or self-employed.

Key Features of Loan Against Property

• Loan Amount: Typically 50-70% of the property’s market value.
• Loan Against Property Interest Rate: Generally ranges from 8% to 12% per annum.
• Tenure: Long-term, ranging from 5 to 20 years.
• Processing Time: Can take a few days to weeks due to property valuation and legal checks.
• Repayment Flexibility: Paid in EMIs over the loan tenure.
• Risk: If the loan is not repaid, the property may be foreclosed by the lender.

This is ideal for those needing a large loan amount with a longer repayment tenure.

Understanding Loan Against Life Insurance

A loan against life insurance is a strategic way to unlock the value of your policy without surrendering it. Many policyholders consider surrendering their insurance during financial difficulties, but this often results in a significant loss, as they receive only the surrender value, which may be lower than the total premiums paid. Instead, taking a loan against your life insurance policy ensures that you retain the benefits of the policy while gaining access to much-needed funds.
By opting for a loan rather than surrendering the policy:

• You continue to enjoy life cover – The policy remains active, ensuring financial security for your beneficiaries.
• Your policy’s value keeps growing – The underlying investment component continues to accumulate returns.
• You get a lower interest rate – Since the policy acts as collateral, lenders offer more favorable loan terms compared to unsecured loans.
• There are minimal eligibility hurdles – Unlike traditional loans that require a high credit score or extensive documentation, a loan against life insurance is relatively easier to secure.

A loan against a life insurance policy allows you to borrow money using the policy’s surrender value as collateral. This is an excellent option for those who need quick liquidity without risking tangible assets like property. Moreover, repayment flexibility varies—some lenders allow you to pay only the interest during the tenure and settle the principal later, ensuring minimal strain on your finances.

Key Features of Loan Against Life Insurance

• Loan Amount: Typically 60-90% of the surrender value of the policy.
• Interest Rate: Lower than personal loans, usually between 8% and 16% per annum.
• Tenure: Can extend up to the remaining policy term.
• Processing Time: Faster than property loans, usually within a few days.
• Repayment Flexibility: Can be repaid through EMIs or deducted from the maturity amount.
• Risk: Defaulting on the loan may result in a policy lapse or the lender surrendering the policy to recover the loan amount.

Comparison: Loan Against Property vs. Loan Against Life Insurance

Which One Should You Choose?

• Choose a Loan Against Property if you need a larger loan amount, have a valuable property to pledge, and prefer a long repayment tenure.
• Choose a Loan Against Life Insurance if you want a quicker loan process, and have a life insurance policy with a good surrender value.

Both loans cater to different financial needs. If you require a high loan amount for major expenses, a loan against property may be the better choice. However, if you need moderate funds with faster processing, a loan against life insurance policy could be a more suitable alternative.

Key Consideration Before Choosing a Secured Loan

In both cases you are pledging the asset - property or policy - to the lender, and the lender has the right to recover any past dues from this asset, if your loan were to go into default. This is a key consideration in any secured loan, and one must only choose this option if you are comfortable in your ability to repay or with the idea that you may lose this asset.

Pledging ones’ assets to a lender can be an emotional decision, particularly when it comes to family property or heirlooms. Financial assets, such as life insurance policies are typically less sentimental, and perhaps better suited to fund business or daily cashflow shortfalls if the asset has the value to meet the need.

To explore the best-secured loan options for your needs, use our Sahi Secured Loan Tool.

Mera Kal is happy to help you evaluate your financial options and guide you toward the best loan solution for your context. Contact us today!