Collateral is any property or asset of value that is put up against a loan as security. Loans involving collaterals are called secure loans because they minimize the risk involved in lending. That is why most financial institutions provide you with competitive repayment terms on secured loans.
Just consider home finance, for example. If you need a large sum of money for purchase, you can pledge any eligible security against the loan and, in return, get the requested amount at affordable home loan interest rates.
What Does Collateral Against Loan Mean?
Collateral against loan refers to borrowing money using property as collateral. The collateral property is an asset pledged in return for an amount disbursed for collateral lending. In case of any default in payment of collateral loans on property, the lender can liquidate the asset or part of the asset to secure his funds.
For example, if you plan on starting a business, you can pledge any qualified asset, like mutual funds, government bonds, etc., against the loan. The asset will act as a security for the amount being lent. You can also obtain loans by using property as collateral.
Types of Collateral
Collaterals are basically of two types –
- Immovable property: Immovable property includes your house or a piece of land and liquid assets include insurance policies, government bonds, etc. The value of the collateral you’re pledging, however, must cover the cost of the loanamount disbursed by the lender.
- Liquid security: This refers to easily marketable financial instruments that can be quickly converted to cash. These are considered less risky by lenders as they offer high liquidity and stable value. Common forms of liquid security include FDs, insurance policies, listed shares, government bonds, etc.
Not sure what type of properties you can use as collateral? Read on to learn more.
What Types of Properties Are Accepted as Collateral?
1. Residential property
Any sort of residential house can be accepted as collateral by your lender. It can be a self-occupied house you are currently staying in, a rented residential property that you are using as a source of income, or a vacant residential house that you aren’t currently using. This is a popular asset among lenders as it is easy to liquidate in case of default and retains its value over time.
Additional Read: How to Manage Home Loan EMIs during a Financial Crisis
2. Commercial property
Commercial properties are yet another widely used asset in collateral-based lending, such as housing loans.This could either be a commercial property that you are renting out or a vacant property. What’s more, if you put up a vacant property as collateral, you can avail of high-value loans easily. Unfortunately, there is a catch.
They are acceptable if no residential property falls in the underlying area and must be owned by individuals having no live disputes over its ownership.
3. Property with multiple owners
You can also use any property with multiple owners to avail a loan against collateral, say a home loan. Although the condition is that the property must only be shared among family members with the following relations:
- Mother and son
- Siblings
- Father and son
- Parents and unmarried daughter
Properties from third parties like parents, friends, or other relatives are also accepted as collateral once they meet the minimum requirements.
4. Open lands
Open lands can be used as loan collateral as long as they have a clear demarcation on their boundaries. These lands must be non-agricultural in nature and must meet the minimum criteria for eligibility as collateral.
Additional Read: Top 5 Tips for the Self-Employed to Avail Home Loan
Benefits of Loan Against Property
There are several benefits of pledging a property for a loan:
Enjoy flexible loan tenures of up to 17 years when you use collateral property, allowing easier EMI payments and reducing financial stress.
Since the loan is secured by property, you can access a larger loan amount depending on the property’s market value.
Being a secured loan, a loan against property typically comes with lower interest rates than unsecured loans, making it a cost-effective borrowing option.
Conclusion
Are you looking for affordable home finance options? At Tata Capital, we accept both residential and commercial properties as collateral. We offer secured loans on easy-to-meet home loan eligibility terms that are completely customizable as per your financial needs. Select your tenure amount and choose the repayment option that is best for you.
Determine your loan eligibility and plan your future installments using our home loan EMI calculator. Click here to check our housing finance schemes today.
FAQs
A collateral property is an asset with monetary value that a borrower pledges to a lender to secure a loan. These can include real estate, land, fixed deposits, or other valuable assets. If the borrower defaults on repayment, the lender has the legal right to seize and sell the collateral property to recover the outstanding loan amount.
Assets are either moveable or immovable property that can yield a monetary value. An asset pledged as a security against borrowing is known as collateral.
Any standard moveable or immovable asset yielding a monetary value is acceptable as collateral. The most common forms of collateral are residential properties by owners – whether they currently reside there or have rented them out.
Any asset qualified by the lending institution, either moveable or immovable, can be used as collateral. The most common forms of collateral are government bonds and residential properties.
Yes, a loan can be obtained by using agricultural land as collateral property.
Banks use the collateral to safeguard against a potential default in payments by borrowers. According to the law, lenders have the right to sell a part of or the entire property in case of a payment default.
The collateral acts as a safety net for collateral lending, as in case of default in payment, the collateral property can be sold in part or full to recover the damages.
29 April 2025
4 mins read
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