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Types of Properties Acceptable as Collateral: A Simple Guide

First things first. What is a Secured Loan? And what is the point of a collateral?

A secured loan is a loan that is backed by collateral. Typically, a collateral is any asset with an assessable market value and the lender normally offers back-to-back funding against the security of collateral.

The advantage of the collateral is that the lender is reassured that they will not lose money in the event of default, and so the lender is willing to offer loans even if your CIBIL credit score is slightly lower. Normally, the rate of interest on collateral property loans is lower than on unsecured loans.

Types 0f Collateral that can be Offered -

When it comes to property related loans, the question is what kind of collateral property can you offer as security for the loan?

That would depend on the size of the loan and the risk perception of the lender. Here are some methods by which you can offer collateral for loan.

  • First lien collateral loans are where the lender has the first right over the property over other lenders in the event of default by the borrower. The lender can then issue a default notice and send the property to auction to recover the loan amount.
  • Second lien collateral is a subsidiary collateral. In this case, the first lien is offered to other lenders and the second right is offered to the new lender. This is feasible if the property value is high compared to the value of the loan.
  • Inclusive collateral is when the borrower offers the property with the contents. For example, house with all furnishings or factory warehouse with all business inventories or plant with all the machinery and equipment installed in the premises.

Depending on the value of the loan and the terms and conditions of the lender, the collateral can be appropriately offered.

Which Properties Can Be Offered as Collateral?

That depends on the internal policies of the lender. The main point is that the property must be registered in your name to be able to avail the collateral loan. The following immovable properties can be offered as security collateral property for the loan:

  • You can offer residential property as collateral for the loan. Residential property must be as defined under the Act. This can include an apartment, independent house with land attached, it can be a self-occupied property or it could be leased out to a tenant. Normally residential properties have ready secondary market value and it is not too tough to dispose of such properties. Hence, for personal and business loans, this is the preferred mode for lenders.
  • If you own any commercial property like office unit, office building, factory premises, shed, warehouse; then such commercial property can also be offered as collateral for getting loans. Commercial property is normally offered as collateral property for business loans and the banks insist that such borrowing be done by artificial persons (company) only. There is a small catch. Such commercial property must be registered in the name of the business unit with no disputes, legal cases, or liens on the same. However, secondary market valuation can be tough.
  • Co-owned property that is owned by two or more persons can also be offered as property collateral, subject to all the co-owners give assent. The bank may insist that such property is co-owned by family members only. There must be assurance that there are no internal disputes or will that can come in the way of individual shares of the property. People are also allowed to offer relative’s property as collateral subject to being a close blood relative.
  • Even an open plot of land can be offered as collateral property for loan. The only condition here is that the borders of the open plot must be clearly defined by the municipality or appropriate authority with coordinates. Once the property is demarcated and registered, it can be used as collateral for loans. The bank will take a final view based on the size of the plot, its market value, scope of appreciation, location, risk of coastal regulation & zoning laws etc. Clean title is – again – the key here.

In short any of these can be offered as collateral. There are also schemes by banks wherein lease rentals receivable can be securitized for loans.

What Happens to Collateral in the Event of Default?

That is a situation best avoided in collateral property loans. Under the collateral loan agreement, the borrower has to deposit the original title deeds with the lender for the loan. In the event of default, the lender has to give notice to the borrower and time to repay the loan or the balance EMIs. If that is not done, then a second notice is sent. It is best to negotiate a deal at this stage. If the loan still remains unpaid, the property can be auctioned and the loan amount with legal charges can be adjusted against the proceeds of the property. That is the last resort!

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