Loans can be divided into two segments, secured and unsecured. While the secured loan consists of a loan against security, unsecured loans are primarily extended by banks and financial institutions without seeking any security from the borrower. One of the prominent loans is collateral loans. However, before understanding it, let’s understand what collateral securities are!
What Is Collateral Security?
There are two types of securities, primary security and collateral security. Primary security is the security that is created out of the loan facility extended to the borrower. In case, any other security is offered against the loan, that security is known as collateral security.
For instance, if the funds are borrowed for buying a loan, then the home will be regarded as primary security because it is created out of the funds availed from the loan. However, if the borrower also provides a fixed deposit (FD) as security to the lender, then the FD will be considered collateral security.
What Are Collateral Loans?
Collateral loans are a type of secured loan whereby borrowers can provide any collateral asset or security to the lender against securing the loan. In case of any default in repayment of the loan, the lender gets the right to proceed against the collateral security furnished by the borrower.
Types of Collateral Loans
Here are some common types of collateral loans:
- Loan Against Securities: Here, banks and financial institutions extend a loan against securities that can include shares, mutual fund units or bonds. As the assets are riskier and involve volatility, the loan to value (LTV) is a bit lower as compared to loans against other asset classes.
- Loan Against Property: Here, borrowers can avail of a loan against providing their real estate property as collateral security. This is one of the most common types of collateral finance availed of by borrowers primarily because it attracts lower interest rates, and they can borrow a significant amount by providing property as collateral security. Real estate property is less volatile and serves as a secure asset for the lender. Further, loan against property can be availed of against both residential and commercial properties.
- Loan Against Gold: This is yet another loan against collateral option for the borrower whereby they can pledge gold against borrowing funds from the lender. Gold also serves as a secure asset, making them eligible for financing.
- Loan Against FD: FD can also be used as collateral security for borrowing money from banks and financial institutions. FDs with banks involve a lock-in period. Premature withdrawal of FDs can attract penal charges and loss of interest for depositors. Therefore, a good way out is to secure a loan against the FD by providing it as collateral. Additionally, many institutions offer a setoff of the FD interest income against the loan, reducing the net interest rate on the loan.
- Machinery Loan: Banks and financial institutions provide borrowing facilities by accepting machinery as collateral securities. Usually, this serves as a relief to the business professionals who require financing but don’t want to pledge their personal assets as collateral.
Other examples of collateral loan include loans against insurance policies, valuable items, accounts receivables and inventory.
What Are the Charges Involved in Collateral Loans?
The charges involved for availing of a loan against collateral vary among lenders. Moreover, it depends upon the type of collateral loan that you want; whether it’s a loan against property, vehicle, fixed deposit, gold or any other asset. However, as collateral loans are secured loans, the collateral loan interest rates are quite lower compared to the unsecured lending arrangements.
Collateral loans have always been a saviour in times of emergency. One of the foremost benefits available to borrowers is that collateral loan provide them access to capital that otherwise is blocked in the asset. A borrower can use this loan to meet emergencies as well as fund their business and expansion plans. With the advent of technology, now you can easily avail of a low-interest collateral loan online. Visit Tata Capital’s website and apply for a collateral loan online now!