Last Updated on February 1, 2021 by Ope Quadri
You’ve heard about the soft and collateral-free loan, SME, housing, car, and all kinds of funding for personal and corporate use?
Usually, all kinds of funding fall into two major types of loans. Whether the funding is from the government, non-governmental organisation, or from a financial institution, they could be categorised as:
- Secured loan
- Unsecured loan
In this post, we’ll take a look into what makes a secured and unsecured loan, most especially when you’re trying to get loans from Nigerian banks.
This is a loan whereby the borrower is compelled to produce collateral like property, movable assets.
Usually, the collateral which is also known as a guarantee are always worth more than the amount of the loan.
Significance of collateral
The money lender is in a business, he makes profits from the interest from a borrower as such he puts in place every mechanism to ensure that he doesn’t run into loss.
This way, the collateral can be claimed by the lender in case the borrower fails to pay back or failed to fulfil his own side of the agreement.
That’s why there will be always terms and conditions before you take a secured loan. For instance, a property worth N5,000, 000 could be collateral for someone taking a N2, 000, 000 loan.
It is called “term loan” which is granted by financial institutions for a specific amount and repayment terms, as well as a fixed or fluctuating interest rate.
If you default, the lender can put a lien on the collateral (a lien is a legal term for the lender’s claim to the borrower’s collateral.)
The lender can keep the lien active until the loan is fully paid. That;s when the collateral ownership reverts back to the borrower.
The moneylender has the legal right to put up the collateral for sale if you default. He does this to cover any losses incurred on the loan.
That’s how it works!
Types of Secured Loans
Most times, secured loans in Nigeria covers business funding running into millions or billions of naira.
Kinds of secured loans vary from country to country, but generally here are the types of loans that require collateral:
- Mortgage Loan
- Vehicle loans
- Secured credit cards
- Secured lines of credit
- Bad credit loans
- Car loan loans
- Pawnshop loans
- Life insurance loans
We’ll delve deeply into these in our subsequent publications. Let’s a take a look at the most popular ones which is…Mortgage Loan.
Also known as housing loan, which is currently being undertaken by the federal government where 300, 000 housing units are built for the benefits of Nigerians at affordable price.
A mortgage loan is usually granted by financial institutions for the purchase of property usually with specified interest rate and the repayment period.
It’s one of the easiest loans banks are interested in because the property itself is the collateral.
If you backslide on the terms and mode of repayment, it could lead to foreclosure (that is seizing of the property). In simple terms, the ownership could be taken by the lender.
An Unsecured Loan is a collateral-free loan in which the borrower does not need to pledge any asset to access funding.
But the lenders are also smart because it riskier than the secured loan, so the interest rates are usually higher.
Types of unsecured loans in Nigeria
- Payday loan
- Personal loan
- School fees
- NEXIT-CBN Loan
- Survival fund
- NYIF Loan
- Business startups
- GEEP Loan
- Develop business
- Repair car
- Credit Card Loan
- Buy car
- Medical bill
Credit Card Loan:
This isn’t popular in Nigeria, but it is very important to note that it is one of the unsecured loans provided by banks in yje United Kingdom, United States of America (USA) and some European countries.
Credit card loan is issued by financial institutions to allows cardholder to spend an amount above his account balance, but up to an agreed limit.
The bank usually carry out regular checks and reconciliations at intervals to balance the account and claim interests, charges and principal according to the terms and conditions.
As the name sounds, it is a loan granted to settle personals stuffs like electricity bill, data etc. It’s generally for personal use.
You could get this loan from your bank if you have a good credit record. Personal loan is Nigeria is now popular among online loan firms. In some countries, it’s referred to as consumer loan.
- A secured loan has a lesser risk for the lender because there is collateral to cover up for any unimaginable default by the borrower.
- An unsecured loan is collateral-free funding for businesses and individuals either for personal use or for small businesses.
- An unsecured loan is riskier for the lender because there is no guarantee to retrieve his money, however, it attracts a higher interest rate.
The most important thing is to check the seven things to consider like reading the terms of a loan before signing the papers irrespective of how lengthy the agreement is. If you can’t read, tell your lawyer to read and analyze the content for you.