What Are Collateral Loans and How Do They Work?

Updated on: 17 Jan 2024 // 3 min read // Loan Against Property
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Whenever you need money, especially when it comes to purchasing something huge, you may considering going in for a loan. Usually, you need to set aside an asset or property as collateral. This gives the lender or bank the assurance that you are going to repay the loan. Collateral acts as a backup so in case you fail to repay the loan, the lender can take over the asset or property. Obtaining a loan without any term is also possible. This kind of a loan acts as a gift since the receiver is not under any obligation to repay the loan.

Many people feel that the idea of collateral revolves around trust. This is however not true. Although many people can prove that they are trustworthy citizens, it does not mean a loan can be blindly given without securing collateral.

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What Exactly is Collateral?

Collateral helps in providing some form of security for the borrower to repay the loan promptly. Borrowing money against the value of your house helps to give you that boost to pay back the loan. This ensures you can keep the house you used as collateral. The borrowers voluntarily put up their home as secure collateral against the loan, understanding full terms and conditions that come with the loan.

What Does This Have to Do with a Collateral Loan?

Providing the bank with at least a partial repayment value of the loan, collateral works to ensure the loss incurred, if any, does not have to be total. It is a loan in which the asset pledged as collateral and not the creditworthiness of the borrower is the ultimate source of repayment. In simple terms, a collateral loan refers to borrowing money while putting something that you already own as collateral.

Home Loans are the most popular kind of collateral loans. In this case, an individual borrows money while securing their loan with their house. People apply for a Home Loan to buy property. Another most common type of collateral loan is Loan Against Property. When you require immediate funds for financing any of your personal need, you can Apply for a Loan Against Property Online or offline.

The Manner in Which Collateral Loans Work

Collateral loans are very similar to other traditional loans. You have to apply for the loan, and once it is approved, you enter an agreement to repay the loan during a specified period. After the bank and you agree on the number of monthly payments, and you repay the amount at the specified regular intervals, the term of your loan comes to an end. One of the significant differences with collateral loans is that repossession of the asset or collateral you have put down is possible if you default.

If you take a Loan Against Property for instance and stop paying the loan, the bank can forfeit your property (collateral) to recover their money. Qualifying for a collateral loan requires you to prove the value of your assets. In addition to this, you also have to prove ownership with a title. Possessing a good credit score helps to work to your advantage.

Obtaining a Loan Against Property

A Loan Against Property is one of the variants of the Personal Loan. It is a secured loan that utilises one or more properties owned by you as collateral. When you apply for a Loan Against Property (LAP), you give a guarantee to repay the loan by using your property as security. Since LAP comes with proper collateral and longer tenure, the interest rates that come with it are lower. The documentation required and eligibility criteria for securing such a loan is limited. Some of the documents needed for obtaining such a loan include:

  • Bank statements
  • The borrower’s identity proof
  • The borrower’s address proof
  • Income tax returns
  • Property documents
  • Salary Slips
  • Certified financial statements for self-employed individuals