Immovable assets help investors generate wealth and act as a safety net during adverse situations. Even though it is an illiquid asset, it can be used to secure loans. Thus, immovable assets act as collateral.
Check the process of applying for a collateral loan in India
What is collateral?
Collateral is a valuable asset, which can be pledged to secure a loan. The borrower uses an asset as collateral security to get a loan. For instance, when a homebuyer invests in property, they offer the same property as collateral. Hence, banks keep the original property documents till the loan is repaid. Since the property purchased by the buyer acts as the security against the loan, in case of any problem, the bank will be free to sell this collateral in the open market and recover losses.
What kind of property can be used as collateral?
All kinds of property can be used as collateral to secure a loan from a bank. These include:
Residential property: Residential property is used for living. Whether you are living in the property or have rented it out is not important for a bank. They only require clear property titles to use your residence as collateral to offer you a loan.
Commercial property: Commercial properties are high-value properties and can be pledged to secure a loan. Once again, whether you are running your business or have leased it out is immaterial to the bank. The bank would only check for clear property titles.
Land: Land is one of the most preferred immovable assets as collateral. This is because selling them off is the most convenient.
Can a joint property be used as collateral?
Yes, a property in which your close family members are co-owners can be used as collateral. However, the co-owner must provide their consent at the time of applying for the loan. In case they have an issue with the arrangement, the bank would refuse to accept the joint property as collateral. Properties jointly owned by your spouse, parents and children can be used as collateral to get a loan, as long as you and the joint owner are on the same page.
Will the bank keep possession of the property used as collateral?
No, the owner continues to live in a property used as collateral. The bank only keeps the property papers. As long as you pay your EMIs regularly, the property remains yours. At the end of the loan tenure, you can get back the property papers from the bank.
When can the bank possess the collateral?
In case you fail to repay your loan consistently for a prolonged duration, the bank can initiate action and send reminders to clear dues. Failure to comply would force the lender to repossess the property. It would still give you time to claim your property after paying a penalty. Further non-compliance would force the financial institution to start open action for property sale.
How does collateral help?
Loans that are secured through collaterals are more affordable when compared to loans that are not. Therefore, home loan interest rates are lower than personal loan interest rates or credit cards. The same is true of gold and auto loans.
FAQs
What is a collateral loan?
A collateral loan is backed by a security. Such loans are known as secured loans.
Which loans are common examples of secured loans?
Home and auto loans are common examples of secured loans.
Which loans are common examples of unsecured loans?
Personal loans and credit card loans are the common examples of unsecured loans.
Can liquid assets be used as collateral?
Yes, liquid assets like government securities, bonds, insurance, fixed deposits and gold can be used as collateral.
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