A collateral loan is a type of secured loan arrangement between the lender and borrower wherein the borrower pledges assets (collateral) like property, financial securities, etc. to secure a loan. The understanding is that in case the borrower is unable to repay the loan, the lender can recover the amount by getting ownership of the collateral. Such loans enable borrowers to get larger loan amounts for longer tenures, depending on the nature of the collateral pledged. The value of collateral further assists the borrower to negotiate the terms of the loan arrangement. Such negotiation could be to a lower interest rate, higher loan amount, favourable loan tenure etc.
The purpose of the loan could be for personal uses or for business expansion. . Assets such as private / commercial vehicles, Commercial and Residential Property, Investments like fixed deposits, shares, other financial assets, etc., are eligible to become collateral for the loan from the financial institution. Read more to understand a few types of collateral loans.
Thus in conclusion, collateral loans can be taken either for the purchase of a particular asset, in which case the lender keeps the ownership of the asset until the loan is repaid; or alternatively, they are taken by borrowers who pledge already owned assets to borrow a large amount of money with a long repayment tenure.
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