A loan that is obtained by offering an asset of yours, as collateral, is known as a collateral loan. In such a loan, the lender does not run any risk. He has your asset as ‘security’ and in case on any failure on your part, in repayment of the loan, he has the right to dispose of the collateral and adjust the value realized against the money you may owe him. At the same time, there is one advantage for you as a borrower. Since you are giving an asset of yours as collateral, the chances of your getting a higher amount of loan will be bright.

Salient point of a collateral loan

As a safety measure, lenders usually would like to have an assurance that the money they lend will be repaid in full; or at least, the loss will not be much in the event of borrower’s failure to repay in full. With this in view, lenders always insist on, and get some collateral, from the borrowers. If there is no collateral, the loan becomes an ‘unsecured’ one and the lender stands to lose, either the whole amount of loan, or a major part of it, when the borrower fails to repay the loan. The lenders do not hesitate to approve the application for collateral loan as there is assurance for recovering the loan amount in case of default by the borrower. 

Let us now see about the assets that are accepted as collateral for sanctioning a secured loan. Quite a number of assets are there which can be, and are, treated as collateral for the purpose of a loan. To mention a few, investments, insurance policies, automobiles, house property – all these can be considered as collateral eligible for getting a loan. It is the general practice of the lenders to lend you only 50% of the market value of the assets you have offered as collateral. Sometimes, they may not lend even to this extent. The reason is they want to be fully protected even in the event of a decline in the market value of the assets offered as collateral.

There are many types of collateral loans. Sometimes, you will be allowed to offer as collateral, even the property you are intending to buy! In this regard, there is a very good example. An insurance policy, you are about to take, will be treated as collateral. Both the insurer and the lender will work together, in unison, to see that you not only get the policy but also the loan! Also, if you have any idea of buying a house and have selected one, you will be allowed to offer that house as collateral; you will be given loan against it.

Why are the lenders particular about collateral to sanction a business loan? This is to avoid losing the money in case of loss in the business. The property set as collateral can be disposed by the lender to recover the funds lent for the business. If you want to avail a business loan, you can offer the machinery and/or equipment you are likely to buy, as collateral. Having said so much about collaterals, there may be doubts in the minds of some people: ‘What is the point in offering an asset as collateral, if there is a likelihood of losing it?’ The only answer is this: You do not have any other option! Can you find fault with the lenders when they want you to have a certain amount of stake in the loan you avail?