When it comes to loans, collateral is the most daunting term for people. The question seems very basic, but there always remains a lack of clarity about the various forms of properties and their applicability as collateral for a secured loan. The article you are about to read would bust all the myths and clarify the various types of properties accepted for a collateral and secured business loan.
What is meant by – Collateral against Loan?
Collateral can be an asset that the borrower pledges to the lender as security against the secured loan. It is a supporting medium for a loan transaction as the lender can liquidate it in case of any default in payment and thus it acts as a security against the amount being lent by the lender.
Going with an example, suppose you want to start a new business for which you are planning to take a loan. Your lender would ask you to pledge any collateral like your property or some other kind of security like real estate, bonds, or government securities of the same or higher financial value. Further, once the lender does the assessment and is satisfied with the document, they would easily grant you the loan and fulfil your financial requirements.
Various types of Collateral:
Collaterals are generally classified as: –
- Immovable Property/Assets
- Liquid Assets
Immovable Property/Assets are the assets in the form of a house, residential building, or a parcel of land. Liquid Assets are the ones that can be easily liquidated like Government securities, Bonds, Insurances, Fixed deposits etc.
People have a myth that all forms of property qualify for a collateral loan, but this is not at all correct. Read ahead to know about the types of properties that are accepted for a secured loan.
Types of Properties that are eligible to be collateral for the loan:
- Residential Properties: –The home you live in is rightly said as your greatest asset. All the forms of residential properties qualify for a secured loan, it can be the house you are presently living in, any residential apartment you have rented or any other form of the residential property lying vacant. Residential properties are the most preferred collateral for lenders and the loan processes concerning these kinds of assets are highly streamlined. You can continue living in your home and once you are done with paying back all the loan outstanding you can easily claim back the ownership rights of your residential property.
- A plot of land: –Parcels of land in your ownership can also act as collateral with just the basic requirement of being properly demarcated out for identification purposes. The rules regarding land ownership vary from state to state, so just as a matter of caution once refer to your state’s guidelines regarding land ownership. Also, the land you are pledging as collateral should not be agricultural land and it should be free from any kind of ownership disputes.
- Commercial Properties: –Properties following certain specific municipality guidelines are designated as commercial properties. These are the properties that are generally used by enterprises and for all other commercial purposes other than residing. Commercial properties are also in high demand as collateral in present times as they are of huge financial value and lenders easily accept them as a security against any secured loan.For a commercial property to be eligible for a secured loan you must check that no residential property falls in its vicinity as per the local municipal guidelines.
- Properties having more than one owner: –There is a lot of confusion regarding the eligibility of properties with multiple owners for a secured loan. A property having multiple owners can also be pledged as collateral against any secured loan just with a basic condition that the said properties ownership must be shared among the close family members and should not have any live ownership disputes.The relations preferred in this case are parents and children, siblings, or mother-son etc. Other relationships like in-laws, friends and other parties can also be considered based on the guidelines of the lender.
If you are interested in collateral loans for housing finance or secured business loans for your start-ups you can refer to various online portals, most preferred one currently is Piramal Finance.