6 Things You Should Know About how Collateral Loans Work

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Collateral is the technical word used to identify the asset that you pledge to a bank or financial institution in exchange for a loan. Collateral can be anything from property to shares and mutual fund units. Pledging collateral offers the lender a degree of assurance in case you default on loan repayment.

In exchange, you benefit from a large loan amount at a nominal interest rate. So, a collateral loan can be a great way to access money without losing ownership of your assets.

In order to help you make the most of your loan against securities, here are 6 things to keep in mind:

A wide range of assets can be pledged

Whether you have a high-value fixed deposit or an unused property, there is a whole range of assets that lenders accept as collateral. For instance, Bajaj Finserv offers a Loan Against Property, Loan against Securities such as mutual funds, IPO, ESOPs, shares and insurance, as well as a Loan Against Fixed Deposit.

The market value of the collateral is important

Before giving you a collateral loan, the financial institution will check the market value of the asset. Only a percentage, known as the loan to value ratio, will be given to you as a loan. For instance, with a Bajaj Finserv Loan Against Securities, you have an LTV ratio of 50%. This means that to get a loan of Rs.5 lakh, you require your shares or mutual funds to have a market value of least Rs.10 lakh.

You get liquidity without losing the asset

Collateral loans offer you liquid finance and at the same time preserve your ownership of the asset. For instance, if you are expecting a large sum of money from some channel in a few months and need finances to purchase new office space in the meanwhile, you can take a loan against securities instead of selling your bonds for a win-win situation.

Loan tenors span from few months to several years

Financial institutions will offer you different tenors for collateral loans. For example, the Bajaj Finserv Loan Against Property gives you a long tenor spanning up to 20 years, whereas a Bajaj Finserv Loan Against Securities has a tenor of 12 months. Thus, knowing the tenor and pre-planning repayment is vital to maintaining your credit score.

The lender reserves the legal right to a lien

In case you default on your loan repayment, the lender can evoke a lien. The lien gives the financial institution the right to acquire your asset and sell it to recover the outstanding dues. This is another reason why you should plan your repayment strategy well in advance.

You can make pre-payments and foreclose the loan

Most lenders will give you the option to pre-pay and foreclose your loan amount during the tenor if you end up with surplus funds. The advantage gets even better with Bajaj Finserv, as when you take a Loan Against Securities, for example, you can make prepayments and foreclose your loan at no additional costs whatsoever! You can get all this and more at affordable interest rates, with a Flexi facility. What’s more, in case of doubts and queries you can contact your relationship manager, 24/7.

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