Loan Against Shares for Listed Companies: A Complete Guide

A loan against collateral is a secured loan where a borrower pledges/mortgage an asset to obtain funds from a lender. This asset, known as collateral security, acts as a guarantee, reducing the lender’s risk and allowing for lower interest rates and higher loan amounts compared to unsecured loans.

Collateral loans are widely used for personal and business financing, enabling borrowers to leverage their assets for liquidity. Common types of collateral include property, fixed deposits, gold, securities, and vehicles. If the borrower defaults, the lender has the right to seize and sell the collateral to recover the outstanding loan amount. Understanding how loans against collateral security work, their benefits, and potential risks is crucial for borrowers before opting for such financial solutions.

What are collateral loans and how do they work?

Collateral loans are secured loans that require the borrower to pledge an asset as security. The value of the collateral determines the loan amount, which is typically calculated based on the loan-to-value (LTV) ratio set by the lender.

The lender holds a legal claim over the pledged asset until the borrower repays the loan in full. If the borrower defaults, the lender can seize and liquidate the collateral to recover the loan amount. These loans are often used for business expansion, education, medical emergencies, or other financial needs.

What is a collateral loan?

A collateral loan is a type of secured loan where an individual or business pledges an asset to obtain funds. This reduces the lender's risk, allowing for more favourable loan terms such as lower interest rates, higher loan amounts, and flexible repayment options.

Borrowers can use a wide range of assets as collateral, including real estate, gold, stocks, bonds, and fixed deposits. The loan amount depends on the market value of the pledged asset and the lender’s LTV ratio.

Pros and cons of collateral loans

Collateral loans offer multiple benefits, but they also come with risks. Borrowers should evaluate these factors before choosing a loan against collateral security.

Pros of collateral loans include:

Lower interest rates – Since the loan is secured, interest rates are lower than those of unsecured loans.

Higher loan amounts – Borrowers can access larger funds based on the value of their collateral.

Flexible repayment options – Lenders provide extended repayment terms, reducing financial burden.

Easier approval process – With reduced lending risk, financial institutions are more likely to approve these loans.

Longer tenure – Borrowers can opt for extended repayment periods, making instalments more manageable.

Cons of collateral loans include:

Risk of asset loss – Defaulting on the loan may result in the lender seizing and selling the pledged asset.

Longer processing time – The need for asset valuation and verification may lead to a longer approval process.

Valuation dependency – The loan amount is based on the assessed value of the collateral, which may not match the borrower’s expectations.

How do collateral loans work?

Collateral loans operate on a secured lending model where borrowers pledge an asset as security in exchange for funds from a lender. The lender assesses the value of the collateral and determines the loan-to-value (LTV) ratio, which dictates the maximum loan amount a borrower can receive.

Once the loan is approved, the borrower agrees to repay the principal amount along with interest over a fixed period. The pledged asset remains under the lender’s control until the borrower fully repays the loan. If the borrower defaults, the lender has the legal right to sell or liquidate the collateral to recover the outstanding amount.

Lenders offer different types of collateral loans, including loans against property, gold, securities, and fixed deposits. The approval process involves document verification, asset valuation, and agreement finalisation, ensuring that the borrower can meet repayment obligations. Once the loan is fully repaid, the lender releases the collateral, restoring full ownership to the borrower.

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Where can you find loans with collateral?

Loans against collateral are available from various financial institutions, each offering different terms, interest rates, and eligibility criteria. Borrowers can choose from banks, non-banking financial companies (NBFCs), online lending platforms, and credit unions, depending on their financial needs and the type of collateral they can provide.

Banks are the most common source of collateral loans, offering structured loan products with competitive interest rates. They provide loans against assets such as property, fixed deposits, and gold, ensuring security for both the lender and borrower.

Non-Banking Financial Companies (NBFCs) also provide collateral loans with flexible terms and quick approvals. These institutions often cater to borrowers who may not meet the stringent requirements set by traditional banks.

Online lending platforms have emerged as a convenient option, offering quick disbursement of collateral loans with minimal paperwork. These platforms use digital verification processes to evaluate collateral and provide funding efficiently.

Credit unions are another option for securing a loan against collateral security. They may offer lower interest rates and more personalised lending terms compared to commercial banks, making them suitable for individuals looking for affordable financing.

Before applying for a collateral loan, borrowers should compare multiple lenders to find the best interest rates, repayment terms, and loan conditions that align with their financial goals.

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Types of collateral loans

Collateral loans come in various forms, depending on the type of asset pledged/mortgaged as security. These loans provide borrowers with access to funds while leveraging their existing assets. The type of collateral chosen affects the loan amount, interest rate, and repayment terms.

One of the most common types is a loan against property, where residential or commercial real estate is mortgaged as collateral. This type of loan allows borrowers to secure high loan amounts with extended repayment periods, making it ideal for long-term financial needs such as business expansion or education funding.

A loan against gold enables individuals to pledge gold jewellery or coins to access short-term financing. These loans are usually processed quickly, with minimal documentation requirements, making them a popular option for urgent financial needs.

For those with fixed deposits, a loan against fixed deposit is an excellent option. Borrowers can pledge their FD as collateral and secure a loan at lower interest rates while continuing to earn interest on their deposit. Learn more about fixed deposit collateral here.

Another option is a loan against securities, where shares, bonds, or mutual funds are pledged to obtain financing. This type of loan allows investors to unlock liquidity without selling their investments, ensuring they retain market exposure.

A vehicle loan is also a type of collateral loan where automobiles, such as cars or motorcycles, are used as security for financing personal or business needs.

Choosing the right type of collateral loan depends on the borrower's financial situation, asset availability, and loan requirements. Understanding the terms and risks associated with each loan type ensures borrowers make informed financial decisions.

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Conclusion

A loan against collateral is a practical financing option that enables borrowers to access funds while leveraging their assets. These loans offer benefits such as lower interest rates, higher loan amounts, and flexible repayment terms, making them a preferred choice for those with valuable assets.

However, borrowers must carefully consider the risks associated with loans against collateral security, particularly the potential loss of pledged assets in case of default. By comparing lenders, understanding loan terms, and evaluating financial commitments, borrowers can make informed decisions to effectively utilise collateral-based financing while minimising risks.

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