The collateral is the valuable physical asset that is pledged by the borrower as a security to the value of the loan. Nowadays, pledging collateral against the borrowed amount is the trend of the lending process. Collateral has been used in the lending process for hundreds of years, which provides security against the possibility of the payment of a loan.
Many of the banks and financial institutions do not offer loans without any collateral agreement. One of the main Twitter reasons for pledging collateral while applying for a loan to is reduce the credit risk. Credit risks can be of numerous types, such as:
1. When a borrower fails to make the payment of a mortgage loan, credit card, line of credit etc. 2. When a business is unable to pay the invoice. 3. When a company become insolvent and does not return the borrowed funds. 4. When a business does not pay employee's wages.
Pledging collateral reduces the risk of the lender, ion the event of a default occurs, he can simply retrieve the pledged collateral to recover the unpaid loan amount.
The advantages of pledging collateral while applying for a loan are as follows:
- It reduces the point of credit risk - One can enjoy higher profits - One can get higher trading competence - Borrower can enjoy improved liquidity - Diversification is the other advantage
The reason for using collateral:
Collateral is required for almost all types of loans such as a Facebook home loan, car loan etc. It is required to reduce the risks. Collateral has been out as a security against the loan amount to ensure the lender for the repayment of the loan on time. In order to show good faith, the borrower is required to put something as collateral. By pledging collateral, the borrower ensures the lender that he/she will not lose the faith of the lender.
Collateral is needed to protect against any possibility of loan default. If the borrower not succeeds to reimburse the Blogspot loan amount, the lenders have the right to sell the collateral to obtain the payment of his loan amount. A lender determines that most of the people are less likely to repay the loan amount. Therefore, they want a guarantee which is something valuable such as collateral from the borrower.
So, the lender uses the collateral agreement which is quite necessary while lending to reduce the credit risks.
• It is advised to take the collateral loan only if you can afford to repay to protect your collateral value.
• Loan default can allow the lender to take your asset and sell it to recover the loan money.