Collateral loans: How is it different from unsecured loans?

Collateral loans are secured loans wherein you pledge an asset to access funds from a financial institution

Loans offered by financial institutions fall under two categories: secured loans and unsecured loans. The key difference between the two is that borrowers must pledge collateral to obtain a secured loan. Collateral is an asset that protects a lender from possible defaulting on the borrower's part, thus reducing their risk. Lenders can sell the collateral to make up for any loss.

What is a collateral loan?

Banks and non-banking financial companies (NBFCs) generally disburse two types of loans: secured loans and unsecured loans. A collateral loan is a type of secured loan requiring a borrower to pledge an asset to avail of the loan. The asset, called a 'collateral,’ is liquidated by the lender in case the borrower defaults. On the other hand, unsecured loans do not require the borrower to pledge collateral.

Why do financial institutions ask for collateral?

Collaterals make loans more secure for a financial institution. Despite having a good CIBIL score, often, borrowers may fail to repay their loans. Having collateral protects lenders’ interest, as they can sell the asset to make up for their loss due to non-repayment of a loan.

What can be pledged as collateral?

Collateral loans allow you to pledge the following assets as security:

· Vehicles: A vehicle or machinery is considered a movable asset. Collateral loans are provided against movable assets that hold a resale value. In some cases, a lender might require a borrower to transfer the physical possession of the movable asset to get a collateral loan.

· Gold and other valuables: Gold is valuable, so it qualifies as security for collateral loans. Hence, gold coins, bars, and jewellery can be pledged as collateral. In addition to gold, other valuable articles, such as antiques and fine art, can also be used to secure loans.

· Land or property: Real estate is the most common form of collateral. Your home or a piece of land is worth a significant amount, and financial institutions can use it to secure themselves and offer a loan.

· Personal investments: Your personal investments can also be pledged as collateral. It includes stocks, bonds, and mutual funds. Sovereign gold bonds can also be used as collateral to avail of a collateral loan from a bank or an NBFC.

How to apply for a collateral loan?

Follow these steps to apply for a collateral loan:

· Check your credit score: Before applying for any loan, you must check your credit score. The higher your credit score, the easier it is for you to get a collateral loan.

· Compare secured loans from various lenders: After applying for prequalification with multiple lenders, compare their offers, including lender fees. Doing so can help you find the best deal and save money. You can check out IDFC FIRST Bank's loan offerings here.

· Collect the supporting documents: Be prepared with all the documents requested by the lender before submitting your loan application.

· Submit a formal application: Submit your loan application with the requested details of your collateral.

Once the application is processed, you will receive the funds in your bank account. Depending on the financial institution, the loan amount may take hours or a few days to arrive in your account. If your collateral loan application with IDFC FIRST Bank is approved, the loan amount reaches your account within hours.

Disclaimer

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