What is Collateral Loan?

Collateral Loan

A Collateral Loan is a type of loan which is backed by some asset owned by the applicant. The asset you pledge is a security which will be transferred to the lender in case you fail to repay the loan. A Collateral Loan is easier to get than a loan which is not secured by any asset. This is because the risk of the lender is reduced in this case, as the lender has the assurance that not all his money will be lost.

Assets that count as a Collateral

Based on the lender and as allowed by the law, any asset can serve as a collateral. The assets which can easily be valued and turned into cash are generally preferred by the lenders as collateral. Some of the common forms of assets that are treated great as a collateral are:

Real estate
Investments
Automobiles
Equipment and Machinery
Insurance policies and so on.

Usually, a lender offers you a lower value of your asset as a Collateral Loan. For instance, if you pledge a car worth the value of INR 3,00,000; the lender may only give you around the 75% value of the car, as a Collateral Loan. This a way the lender can recover his money, even if the value of the collateral decreases. In case, the asset you pledge loses it value, you might have to pledge an extra asset.