Article

Collateral Loan
November 27 , 2012

Collateral loan is another name for secured loan. Collateral is what the borrower pledges as security for repayment of loan. Often loans that are borrowed to sponsor huge assets like property or vehicle need to be backed by some sort of security to ensure the lender can recover the loan in case the borrower defaults on repayment.

Collateral loans benefit both the lender and borrower. For the lender a collateral loan reduces risk of non-recovery of money. Banks and NBFCs practically lend to strangers. Having access to an asset whose value is commensurate to the value of the loan gives puts them in relief that in case the borrower defaults their borrowing can be recovered in full or at least in part by selling the asset. Since the loan is less risky the borrower can avail it for lesser cost. Interest rate on collateral loans is much lesser than that on unsecured loan.

Examples of collateral loan are home loan, vehicle loan and loan against securities. In case of home loan the property bought/built with the loan is pledged as collateral. This is also known as mortgage loan in some countries. In loan against securities some kind of financial security like  shares, mutual fund units, insurance policy, NSC, bonds are pledged for borrowing.

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