What do you mean by ‘collateral loans?’ Any loan that is obtained offering an asset as ‘security’ is known as collaterals 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 collaterals 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 it.
What are the assets that are treated as collateral?
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!