Borrowing a secured loan requires you to pledge collateral. Here are five assets that are commonly accepted as collateral by lenders:
House: If the borrowers own a home or any other real estate, they can easily offer it as collateral. For example, mortgages are usable as loans secured by such properties. It gives the lender the right to possess a mortgaged property if the owner defaults on the loan repayment. The second option is to offer home equity as collateral where the loan is securable by the house’s equity. This form of collateral is common when you Apply for Loan Against Property or Home Loan.
Savings Account: As an existing customer of a particular bank, you can apply for a loan, keeping your savings account as collateral. The loan will be a certificate-secured or savings-secured one. This is usually a deposit certificate or savings account, and the bank will fund your project. The most valuable thing about this type of loan is that borrowers can frequently get interested in their deposit while simultaneously using it as a secured loan’s collateral. This would allow you to park liquid cash in a deposit account.
Vehicle: A car, minivan, boat, or truck may also serve as collateral for a secured loan. All car loan providers guarantee the vehicle by its value. The condition is that should a borrower default on an Equated Monthly Instalment (EMI) or fail to pay the loan, the lender is within its legal rights to take away the vehicle and auction it off for recovery of dues.
Future salary: Secured loans are also available to offer future salaries as collateral. This implies that you borrow advance money but need to pay it back as soon as you get your next paycheck. However, this differs from payday loans as their Annual Percentage Rate (APR) costs are higher and, therefore, higher borrowing costs. This type of collateral is less common as most banks do not want to accept this. However, if your salary account is with the bank in question and leaves written instructions with the bank to debit your account as soon as your salary gets deposited, you stand a good chance of getting a cash advance to tide you over. This collateral type comes in handy during dire financial emergencies.
Your personal investments: Investments in mutual funds and stocks are acceptable assets to lenders as collateral. Investments, when used as collateral, are called stock-based or securities-based loans. The private banks generally offer these services, particularly if they are an investor in it or brokerages. The nature of these loans is similar to other collateral-based loans. Your stock holdings or investments serve as collateral against the full loan amount. Banks usually extend credit up to the investment value’s full amount.
However, one needs to remember that when you offer collateral to a lender for any amount, you are pledging a personal asset. It could be the roof over your head or even your expensive and favorite car that you acquired after years of saving. This calls for deeper thinking on what you’ll offer as collateral to your lender. This is more so as the law permits the lender to take away the asset to recover its dues should you fail to repay the loan. Thus, you get to see your house getting auctioned off, leaving you and your family on the road.
A loan, be it secured or unsecured, is finally a liability to the debtor because as long as his dues remain unpaid, he stands to get legally penalized. This is more so in the case of a Home Loan where your very home is on the block. You will also have to offer collateral whose value is comparable to the loan amount and sufficient equity. Even for those with low credit scores, a loan may be available if they provide suitable collateral, as it reduces the lender’s risk because the latter can take possession of the pledged asset.
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