What Are Covered Loans?

Covered loans are loans in which the lender’s money is "covered” by collateral from the borrower. The borrower pledges an asset with the lender and obtains the loan. All legal documents pertaining to asset remains in the possession of the lender. In the event of a default on repayment, the lender gains claim on the asset. Covered loans can be obtained both for a short time frame or a long time period. With short-term covered loans, the borrower usually purchases jewelry and home utility items. Long-term loans are used by the borrower to buy homes and vehicles.

Interest Rates

The rates of interest on these loans are far less than the rates on "uncovered loans." Uncovered loans do not have an asset attached to them. Also, the rate of interest at which an individual is able to obtain a covered loan is linked to his past credit history. The better the credit rating, the lesser is the rate at which he obtains the loan. A borrower with good credit history is also able to get the loan very easily.

Lesser Risks

The lender's risks are greatly mitigated with these loans. If the borrower defaults on discharging either the interest payments or the ultimate repayments, the lender can legally claim the title on the asset pledged. So, she doesn't have much to lose. Also, the lender often ends up earning far more money on the loan than what she actually lent. The extra income is called “add-on-sum." This sum is spread over the tenure of the loan and lender earns at the end of specified periods of time.

Choice of Loan

There are several avenues for the borrower to get these loans from. He can either approach physical establishments like banks and financial institutions with the asset's tittle papers. These institutions will evaluate the asset's value and the amount of loan after seeing whether the asset has depreciated or appreciated in value since the time it was bought. The borrower can also choose to borrow the money online. She fills out a form online in which she would specify the details of the asset and her monthly money. A representative from the company would visit her to assess the asset and on the basis of this report, the virtual company would then sanction her her loan.

Defaults on loans

It is always in the best interest of the borrower to diligently repay the loan as per the contract specifications. In case he defaults on installments, he not only loses possession of the asset but his credit rating also gets affected adversely. He often finds it very hard to get future loans as well.

References

About the Author

Prasanna Raghavendra has been writing professionally since 2000. He has several published articles on websites such as eHow, 12manage, freelancejobs.org and essaywriters.net. Prasanna holds a Master of Business Administration in finance and management from the Management Development Institute, India, where he was given the most outstanding student award.