What is a collateral loan?

A collateral loan is secured loan that allows the borrower to pledge an asset for availing a loan. For this type of loan, the loan amount depends on the value of the collateral. This type of loan is relatively risk-free for the lender, as he has the option to liquidate the asset if in case the borrower defaults. As a result, borrowers can avail a higher loan amount at a lower interest rate than unsecured loans.

Some common assets that can be used as collateral include:

• Private vehicles
• Commercial and residential property
• Machinery and equipment
• Investments such as fixed deposits, bonds, mutual funds, shares, ESOPs
• Insurance policies
• Valuables and collectibles
• Future payments from customers (receivables)

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