What is Collateral Loan?

Borrowers often feel that keeping some kind of collateral such as assets, property, vehicles, etc. helps in faster loan approval. Long-term loans are also known as secured loans above 5 lakhs are considered as collateral loans. Lenders request a collateral against a large loan amount sanctioned. Keeping a collateral against a loan amount acts as a safety for the lenders in case of defaulters. Then, the collateral can be used to recover the pending loan amount.

One of the benefits a collateral loan offers is a low interest as the loan tenure is lengthy and also a valuable asset is deposited against a loan. There are different types of collateral loans – mortgage loans, home loans, automobile loans, real estate loans, etc.

Online lenders: Check for secured loan options online on personal loan apps.

Bank Funding: Better apply for collateral loans with your existing bank to get better interest rates throughout the loan tenure.

Automobile Dealers: Depending upon the vehicle amount, auto dealers approve of collateral loans on new purchases. A good credit score is of help here.

 

Steps to Apply for Collateral Loan

 

1. Check your credit score in advance to get the best interest rate on collateral loans
2. Compare with at least three lenders to acquire the best loan terms and lender fees
3. Prepare documents to submit that reflect your income, financial status, and debts, if any
4. Verify with your lender for any pending paper-work for collateral loan approval
5. Receive the loan amount within a week time. It doesn’t function on an instant basis as the loan amount is large and the lender needs time for a background check.

Mismanagement of Collateral Loans

A collateral loan has a default period of 30 days. After this, the lender may offer a grace period to clear the loan amount. Even after the grace period is missed, some lenders may discuss the reasons for the delay and offer some revised payment plans for ease of payment. However, even after the undertaken steps to clear the obligation, if the loan remains unpaid, borrowers may lose their collateral due to mismanagement of finance or various other reasons best known to the borrower.

Though there is a high risk to lose the mortgaged asset, collateral loans still exist, as a considerable loan amount is offered at one go. Those who are looking for emergency loans or want to deal with a shortage of funds should choose a safe option of collateral-free, unsecured loans also known as instant personal loans. Small cash loans approve a limited amount of money up to a couple of lakhs instantly. Being a shorter tenure loan, instant personal loans are approved with zero collateral. Hence, based on the urgency of finance, choose a wise credit option. A collateral-based loan is only advisable to take when you are sure about clearing the loan on time, without putting the asset at stake. Losing the asset along with defaulting on the loan account will affect the credit score negatively.