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Collateral Loan

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What is collateral?

It is an asset or property that a borrower offers to a lender as a backup in exchange of a loan. The lender can seize and sell the asset if the borrower defaults on the loan.

What is Collateral Loan?

A collateral loan is also known as a secured loan. In this type of loan, the borrower has to pledge an asset to get the loan. The amount of the loan approved depends on the value of the collateral. In collateral loans, the lenders are at relatively no risk as they can liquidate the asset to recover their loan amount if the borrower defaults.

Since these are unsecured loans, borrowers can get approved for a higher loan amount at a lower interest rate.

How Collateral Loan Works?

The lenders sanction the loan only when they are convinced that the borrower has the financial capacity to repay the loan. To ensure that they are risk-proof, they ask for some form of security. This security is known as collateral, and it;

  • minimizes the risk for lenders
  • ensures that the borrower keeps up with their financial obligation
  • ensures that a lender receives full or partial compensation for any outstanding balance if the borrower defaults on the loan.

Examples of Common Assets Used as Collateral

  • Commercial and residential property
  • Private vehicles
  • Machinery and equipment
  • Insurance policies
  • Investments such as FDs, mutual funds, bonds, shares, ESOPs
  • Valuables and collectibles

Examples of Collateral Loans

Here are a few common examples of collateral loans:

  • Home Loan
  • Auto Loans
  • Small Business Loans
  • Personal Loans
  • Loan Against Property
  • Loan Against Securities

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