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Benefits and Drawbacks of Using Collateral to Secure a Loan

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When it comes to effective management of personal finances, most of us struggle with it. This is despite the fact that being Indians, we are brought up with a mindset that savings are essential for securing one’s future but the uncertain financial conditions in modern times, full of ups and downs, leave us wanting most of the times. Due to the rising cost of living as well as our expanding dreams and aspirations, we are always found short of money when any need arises.

As a result, we are forced to postpone certain necessary expenses or have to forego some deepest desires, just to ensure our comfortable survival. This might be the harsh reality of present times,butit’s not as if we cannot do anything to manage and organise our expenses efficiently. With the liberalisation of the financing sector and opening up of the economy, there are various financing options that are available to help us supplement our finances effectively. If you own a property, commercial or residential in India, and require some money to meet upcoming expenses, then you shall apply for a Loan against Property to help you meet your liabilities in an efficient manner.

What is a Loan Against Property?

Loan AgainstProperty (LAP),is a secured loan which is offered by multiple financial institutions in India. In order to avail a LAP,you need to mortgage your property with the lender. As it is a secured loan, LoanAgainstProperty Interest Ratesstartsat9.25%. The repayment tenure available for LAP can extend up to 20 years and the amount available depends on the value of your property, requirements and credit score.

You are free to use the loan amount for any purpose that you desire as there is no need to furnish any such information to the lender. You can continue to enjoy peaceful possession of the property as long as you continue to repay your EMIs (Equated Monthly Instalments) on time.

With the emergence of various online loan marketplaces, you can compare multiple loans against property offerings, compare their interest rates, and apply online for the loan product you find most suitable for your requirements. As the ticket size of a LAP is generally large, the whole process can take up to 7-10 working days.

Different aspects of using collateral to secure a Loan

When you apply for a secured loan with a lender you need to furnish security to be pledged as collateral. This collateral acts as a guarantee of payment against the loan because in case you are unable to repay the loan amount on time, the lender can proceed ahead to auction the collateral to recover the dues. If even after the sale of collateral, some amount is outstanding, you are liable to repay the same. So, to be able to decide if you should pledge collateral to secure your loan, it is important to understand the benefits and drawbacks of the same.

Benefits of using collateral to secure a loan

Following are the key benefits that you stand to enjoy when you offer collateral to secure a loan:

  • Lower Rate of Interest: When you offer collateral to secure a loan, the lender is assured of the repayment as the risk factor downgrades significantly. Therefore, the lender offers you lower interest rates on secured loans as compared to unsecured loans.
  • Higher Loan Amounts: The amount available as a secured loan is always higher than what is available as an unsecured loan and is related to the value of your collateral, your credit score and your requirement.
  • Extended Repayment Tenure: When your loan is secured with collateral, you can opt to extend the repayment tenure up to 15 years, which brings down the monthly instalments
  • Compensates for Lack of Credit History: If you do not have a long credit history, then collateral can help you get the loan amount required by you by securing your loan against potential non-payment.

Drawbacks of using collateral to secure a loan

Following are the major drawbacks of using collateral to secure your loan:

  • The potential loss of collateral: If you are unable to repay the EMIs on time, you stand the risk of losing your collateral as it would be confiscated by the lender and then sold-off to recover the dues.
  • Double impact on credit score: There is a double negative impact on your credit score. Firstly, when you are unable to repay the EMIs on time and secondly when the lender auctions your collateral.
  • Potential Shortfall: Even if after auctioning the collateral, there are dues outstanding towards you then the lender can ask you to repay the shortfall or face legal action.

Using collateral to secure a loan might expose you to the potential risk of losing it due to non-payment,but the advantages that a secured loan has over an unsecured loan are significant and warrant you to prefer a secured loan over an unsecured loan.

Also Read:What Do Lenders Accept as Collateral for Loans?

To apply online for Credit Cards, Secured Loans and Unsecured Loans, visit www.mymoneymantra.com, the leading online lending marketplace that offers financial products from 70+ Banks and NBFCs. We have served 2 million+ happy customers since 1989.

Talk to our Loan Specialists toll-free at 1800 103 4004 to know more about our products and offers.

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