How to use a Collateral loan without risking the property?
What do you mean by ‘collateral loan?’
Any loan that is obtained offering an asset as ‘security’ is known as collateral loan. When you obtain this loan,
you are obliged to ‘pledge’ your asset with the lender, as security for
the loan he is giving you. He has no risk in giving the loan to you since he has your asset as security. As far as
you are concerned, by offering your asset as security, you will get the money you need. It will, however, do a lot
of good to you to know about this collateral loan, before you actually avail it.
When someone gives you a loan, he will
most certainly need an assurance that he will get back the amount of loan. That is the reason a lender insists and
gets security for the loan he gives. In the event of failure on the part of the borrower, in repayment of the loan,
the lender can sell the asset, offered as security, and adjust the amount realized through the sale, against the
loan amount due. The lender will not be in a position to do this if the loan given is an unsecured loan, because
there is no security. The borrower of an unsecured loan does not lose his property because he has not pledged
What are the assets that are treated as
There are a number of assets that could
be offered (and accepted) as collateral, such as your home, automobile, investments, insurance policies, etc. Only
thing is the asset offered as security should have a value higher than the amount of the loan. Even your
anticipated payments also could be offered as security. It is the general practice of the lenders to offer just 50%
of the value of the asset you offer as security; sometimes, they may go up to 75% and in certain cases, they may
offer less than 50%. Their only intention is to get enough cover for the loan they give. So, if the value of the
asset given by you goes down, he will demand money from you or offer additional asset, to balance.
There are a few types of collateral
loans. Besides the assets like car, house and so on, you can even offer the asset you are going to acquire as
collateral. An insurance policy could be cited as an example in this regard. Yes, the insurance cover you are
buying can be offered as security! In such instances, the insurer and the lender in question will work in unison
and they will see to it that you get the loan you require. Similarly, whatever assets you are going to buy, you can
offer them as security to get a collateral loan. It will be beneficial if you can have full and detailed discussion
with the lender.
From the point of view of the borrowers,
there may be a doubt as to why a security should be offered if there is a possibility of losing it. There is no
need to have such a doubt. The lender, since he wants to ensure full repayment of the loan, has no other
alternative but to insist on a security. If there is no security and if the loan is not repaid, what will be his
position? Does he not lose his money? The borrower will lose the money only if he fails to repay the loan. Having
obtained the loan, is it not his responsibility that the loan is repaid in full and in time? You cannot, obviously,
have the cake and eat it too!