When a person pledges any of his assets to borrow money from the lender, such loans are collateral loans. Loans are generally classified into two, secured and unsecured loans. Secured loans include loan against securities, home loan, vehicle loan and others, whereas unsecured loans include personal loans.
Loan against securities is an alternative to get the financial help from the lenders. The shares, bonds, mutual funds, and others are the assets that can be pledged against the loan amount.
When you apply for loan against securities, you will have to mention the details and type of security you will keep as collateral with the lenders. The lender prefers to take the collateral against the loan so that they don’t lose all their money.
When the borrower fails to repay the sum, the lender takes the possession of the collateral, sells it and recovers the lent amount from it. Thus, the lender prefers those assets that are of high value and easy to liquidate.
Features of collateral loan
- The interest rate is comparatively lower than the unsecured loan. One can enjoy lower LAS interest rate as high-value securities back them.
- The borrower possesses a flexible repayment tenor when opted for a collateral loan.
- One can get the benefit of faster loan approval in case of a collateral loan. Those, who apply for loan against securities, will enjoy the benefit of quick loan approval.
- Ownership of the collateral remains in the hand of the borrower. Only the title of ownership of the assets goes to the lender.
- Any Indian citizen who has completed the 21 years and is a trader, businessman or an industrialist is eligible to get the Collateral Loan.
Benefits of collateral loans
A high-value loan
The loans that are backed by the collateral offer the advantage of enjoying high loan amount from the lender. When the borrower applies for the loan against securities, he can get around 50% of the portfolio value as the loan. Collateral reduces the risk of losing the entire loan amount by the lender. Thus, it wishes to offer the loan amount as asked by the borrower.
The borrower gets the freedom of repaying the loan before the completion of the tenor without any extra costs. It boosts the trust of the borrower and enables him to take the loan against securities or any other asset.
Lower interest rate
Collateral loan interest rates are substantially lower than the unsecured loan. Lower interest rate of collateral loan makes it an ideal option to choose when you are in a financial need. The loan against security interest rate is also offered at quite less rate as the credit has collateral backing it. The bank or NBFC can provide a lower interest rate when they are sure that their investment is safe and can be recovered.
Easy withdrawal of funds
One can withdraw the funds either partly or wholly from the loan account when in need. The interest will be charged only on the amount withdrawn from the loan account.
A collateral loan borrower can choose the loan tenor as per his convenience. One can opt for a Flexi loan if he wishes to enjoy the wide range of the tenor. Or else, he can also choose for the Term Loan if he wants to have fixed and small tenor of the loan.
The Bottom Line
As one can see, collateral loans have a lot to offer to the borrowers. You can take advantage of collateral loans and get liquidity without liquidating your assets.