Secured loan is a form of loan with collateral. However, many people still question “What is the interest rate on a secured loan?”. The following article will show the key for this question.
1. What is a secured loan?
Secured loan is a form of loan with collateral. During the loan term, the borrower must retain title to the property.
Secured loans stand out with features such as:
- The borrower still has the right to own the property : The bank only keeps the documents proving the ownership of the property. The property is still owned by the borrower and you can still use it.
- Diversified collateral : Collaterals are valuable assets that will be appraised by banks such as red books or pink books, cars, circulating goods, machinery, equipment… Just own A valuable asset is that customers can apply for a loan at any time.
- The loan term is flexible according to the borrower’s needs, can be extended up to 25 years.
- Lower interest rates than unsecured loans : The more preferential interest rates, the lower the amount of interest to be paid.
- Loan limit up to 70-100% of collateral value . Therefore, this is a suitable loan form for customers who need large capital to invest.
2. The differences between a secured and unsecured loan
|Criteria||Secured loan||Unsecured loan|
|Other name||Loans with secured assets||Borrowing without collateral|
|Characteristics||A form of loan that requires collateral and the collateral must be owned by the borrower and appraised by the bank.||It is a form of borrowing money that does not require collateral, but is based on the creditworthiness and repayment capacity of the borrower.|
|Collateral required||Secured assets according to regulations||There is no need of collateral|
|Interest rate||Lower and descending||Higher|
|Level||70-100% of collateral value||Lower|
|Review time||Long time to verify conditions and process transactions||Fast approval time, quick disbursement, can borrow within the same day|
Thus, secured loans are suitable for those who need large capital to invest. Unsecured loans are suitable for those who need to borrow less, borrow quickly for consumption. Therefore, you should base on the purpose of the loan to choose the appropriate form of loan.
3. Advantages of getting a secured loan
When taking out a mortgage, customers will enjoy many benefits such as:
- Large loan limit : The loan amount can be up to billions of dong (depending on the value of the collateral), meeting many different consumer needs such as investment, house purchase, car purchase, home repair , business, study abroad…
- Reduce debt repayment burden : Interest rates are gradually reduced, long loan periods can be up to 25 years. As a result, customers have more time to manage, balance their finances and repay debts.
- Flexible form of repayment : Monthly, quarterly, and annual interest payment; principal installment or one-time payment.
- The property is still yours : Although the property has been mortgaged, the borrower still has the right to own and use the property. The bank only retains the documents proving the borrower’s ownership of the property as proof.
4. What is the interest rate on a secured loan?
Currently, there are three common types of mortgage interest rates: fixed interest rate, floating rate and compound interest rate. Each type of interest rate has its own calculation method. As follows:
3.1. Fixed interest rate
A fixed interest rate is a mortgage interest rate that remains constant throughout the life of the loan. This means that the borrower needs to pay the same amount of interest each month.
The formula for calculating the fixed interest rate is:
Monthly interest= Mortgaged money x Fixed Interest Rate (%/year)/12
For example : If a customer borrows a mortgage of VND 30,000,000, the interest rate is fixed at 12%/year, the loan term is 1 year. Each month the amount of interest is 30,000,000 x 12%/12 = 300,000 VND
3.2 Floating interest rate
Floating interest rate is a type of interest rate that changes depending on regulations and policies of banks from time to time. Normally, banks will adjust loan interest rates every 3 or 6 months.
The formula for calculating floating interest rate is:
Floating interest rate= Base interest rate + Interest rate amplitude
Monthly interest= Mortgaged money x Floating interest rate (%/month)
In which, the base interest rate is usually the interest rate on savings deposits with terms of 12, 13 and 24 months, and receive interest at the end of the period. The interest rate band is fixed for the life of the loan and is clearly stated in the mortgage contract. Sometimes the interest rate margin changes according to market fluctuations.
Example : A customer borrows a mortgage of VND 30,000,000, with a term of 1 year with a floating interest rate, the interest margin is 0.2%/month.
- From January to March, the base interest rate is 0.8 %/month, so the floating interest rate is 0.8 + 0.2 = 1 %/month. The amount of interest per month during this period is 30,000,000 x 1% = 300,000VND
- From March to June, the base interest rate is 0.6 %/month, so the floating interest rate is 0.6 + 0.2 = 0.8 %/month. The amount of interest per month during this period is 30,000,000 x 0.8% = 240,000VND
- From June to September, the base interest rate is 1%/month, so the floating interest rate is 1 + 0.2 = 1.2%/month. The amount of interest per month during this period is 30,000,000 x 1.2% = 360,000 VND
Thus, compared to the fixed interest rate, the floating interest rate is more volatile and can decrease or increase according to market interest rates and the bank’s policy at that time. If this floating rate is applied, the mortgage loan can be exposed to many risks.