What is collateral for loans
A collateral offered with a secured loan is an asset pledged by the borrower for availing a loan. The loan amount depends on the value of the collateral. The lender’s risk is significantly mitigated as it can liquidate the asset in the event of a default by the borrower. Accordingly, the borrowers can avail a higher loan value at competitive rates as compared to unsecured loans.
The following are the types of collaterals accepted by lenders:
- Personal loan: Personal real estate, home equity, personal vehicles, pay checks, cash or savings account, investment accounts, valuables like fine art, jewellery or collectibles.
- Business Loans: Business or personal real estate, business property like machinery or specialized equipment, business or personal vehicle, farm assets and products, accounts receivable, inventory, insurance policies, investment accounts, business savings account, valuables like fine art, jewellery or collectibles.
- Auto Loan: The vehicle being purchased, personal vehicle already owned, investment accounts, home equity, cash or savings account.
Banks would have the value of the collateral appraised by expert valuers to arrive at the amount of eligible loan. The LTV or Loan to Value Ratio plays a significant role in this regard. The loan-to-value ratio (LTV) is the amount one is eligible to borrow divided by the value of your collateral. If one has collateral with a variable value like an investment account or a used car, it would result in a lower LTV.
Also Read: What do Lenders Accept as Collateral for Loans
For example, in case of shares offered as collateral, to factor in the volatility of the investment, a lender might only offer you 50% of the share value as loans. This is to cover their bases against possible losses.
When it comes to borrowing against your house, lenders generally discount 20% and allow 80% of its value as loan.
A collateral cover is suitable in case one has a moderate credit score, carries other debt in the books, has assets to offer as collateral and is a sole proprietary concern. Now, you will be eligible for a loan if you offer:
- Business loan collateral: In case of a new business, without much vintage in terms of years of operations and lack of high revenues, banks may only be willing to lend in case a collateral is offered.
- Loans backed by a purchase: The same principle applies to diverse loans like those for cars, homes or even big-ticket personal purchases. All such loans may require collateral to ensure some form of repayment. A car, home or item one is buying with the loan can be used as types of collateral for loan.
One can avail a higher limit of finance if one has the right collateral to offer as security to the lender. Collateral broadly comprises private vehicles, commercial and residential property, machinery and equipment, investments such as fixed deposits, bonds, mutual funds, shares, ESOPs, insurance policies, valuables and collectibles and future payments from customers (receivables). However, collateral reflects one’s net worth position, and one must try to avoid a situation of reducing one’s asset base. It is prudent to take on debt to the extent one is capable of repaying.
Get to know all about Hybrid Flexi Personal Loan.
Also, learn about Business Loan schemes for women in India.
“Finserv MARKETS, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!”