What are Collateral Loans?
Read this blog to know what collateral loans are, what are the different types of collateral loans, and what are their various benefits.
What is a Collateral Loan?
There are two kinds of loans -secured loans and unsecured loans. An unsecured loan is when you acquire cash with practically no security to back the credit. A secured or a collateral loan requires the borrower to pledge assets such as immovable property as collateral to get the loan. Depending on the nature and value of the property as well as other factors such as your creditworthiness, repayment capacity and so on, lenders may approve your loan request. In case a borrower defaults or is unable to repay their collateral loan, the lender can repossess their property and auction it to recover their dues.
With a collateral loan the moneylender can claim the resource you set up as insurance assuming you can't take care of the credit. This presents a greater gamble to you as a borrower; however, it diminishes the risk on the moneylender's part. In fact, collateral loans are more straightforward while applying and can likewise be more affordable as well.
Types of Collateral Loan
There are many types of collateral loans that you can avail. Below mentioned are some examples:
Business Loan: For business loans, future payments by customers, land, financial assets, and stock can be utilized as collateral. Borrowers can likewise pledge their personal assets in this type of loan.
Automobile Loan: In this sort of security loan, the vehicle you purchase is the collateral. If there should be an occurrence of a default, lenders can seize the vehicle and auction it to recover their money.
Home Loan: This type of loan is one of the best possible examples of a collateral loan. The property purchased by the borrower with the borrowed loan is used as a collateral to secure the loan. Since the value of property usually appreciates with time, home loans have some of the lowest interest rates and the longest tenures.
Loan Against a Property: You should not confuse the home loan and the loan against the property. In this type of a loan, residential or commercial property already owned is kept as a collateral and the moneylender usually takes it away in case of any default.
Must Read : Home Loan vs Loan Against Property
Loan Through Securities: Everyone likes to invest in capital markets. You can avail a loan against your equities, bonds, digital commodities, physical commodities etc. Every moneylender has a different protocol, but the borrower can claim more than 50% of the value across the market.
Pros and Cons of Secured Loans
| Pros |
Cons |
| Secured loans act beneficial for those whose credit score is not up to the mark. |
Secured loans can only be taken by the individuals who own assets. |
| There is lower fee and lower interest rate in the secured loans which acts as an advantage. |
There is always a risk of losing your asset and there are few red tapes during the application process. |
Conclusion
It is important for you to read the terms and conditions of the money lenders before going for the secured loans. There are state laws that are set as well for the safety of the borrower. Every type of loan has a different protocol which helps the individuals to choose which one they want to opt for. You just need to keep in mind that in secured loans, your assets are at a stake.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.