A security, or collateral is an object of financial value that becomes the property of the lender if a borrower is unable to pay back the loan. Example – Mr. Kumar wants to take a loan of Rs. 50,00,000 from a bank. He is told that he will be given the loan if he offers his home as a security. In this situation, if Mr. Kumar becomes unable to make his regular repayments for a certain period of time, the bank will be allowed to legally take possession of his home.
There are a few different kinds of security, or collateral that are commonly accepted by banks and finance companies in India.
Business loan against propertyIt is the most commonly accepted form of collateral by both banks and finance companies. The property could be a piece of barren land, or a fully built up property. The bank will make an estimate of the value of the property though a professional valuation expert. If the estimated value of the property covers a significant portion of the loan amount you have applied for, then it will be accepted as collateral. Ensure that your documentation and paperwork for the property is all thorough, as it will affect the speed at which your loan will be approved.
Gold loanAn extremely popular form of collateral in India, gold is often used as collateral for business loans . As a normally idle form of wealth, gold loans are a way to use the wealth to conduct business. The bank or finance company keeps the gold safely and returns it upon repayment of the loan, allowing you to get back your favorite jewelry when you make the full payment.
Loan against shares and other investmentsIf you invest in shares and other financial securities in the stock market, whether directly or through mutual funds, you can pledge the shares to the bank as a security and take a business loan. This also extends to insurance and bonds. Your investments will still continue to earn money even as they are pledged so that their growth is still available to you when you fully repay your loan.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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