If you discuss long-term loans, one simple question is, do you need to provide collateral? The response is bases on the type of loan you are acquiring and the rules of the lender. Let us discuss this in a simple manner.
What do you understand about a Long-Term Loan?
A Long Term Loan is a “loan you repay over a longer time”. It may be anywhere between 3 years to even 30 years. Some popular long-term loans are:
- Home loans
- Education loans
- Business loans
- Car loans
- Personal loans (with higher tenure)
These loans have lower EMIS, but you pay for a longer duration.
What Is Collateral?
Collateral is something of value you provide the lender as a guarantee for the loan. It may be:
- Your house
- Land
- Fixed deposit
- Gold
- Car
- Insurance policy
If you default on repaying the loan, the lender may sell the collateral to repay the money.
Long-Term Collateral Required Loans
A few long-term loans do require collateral. The following are some of them:
- Home Loans
Home loans are secured loans. The property that you purchase is the collateral. If you do not repay, the bank may repossess the house.
- Business Loans (Secured)
If you are borrowing a large business loan, banks might require land, property, or assets of your business as collateral. This reduces the risk for the lender.
- Loan Against Property
Here, you give your property as collateral. You receive a long-term loan at a reduced interest rate.
Long-Term Loans That DO NOT Require Collateral
There are some instant cash loan app which do not require any collateral. Those are referred to as unsecured loans. Examples are:
- Personal Loans
You do not have to provide any security. The loan depends on your income, credit rating, and payment history.
- Education Loans (for smaller amounts)
For small amounts, most banks provide education loans without requiring collateral. But for large amounts, they might require security.
- Small Business Loans
There are some government schemes that provide loans to small businesses without requiring collateral. For instance, the MUDRA loan under Pradhan Mantri Mudra Yojana.
Pros and Cons of Collateral
Pros:
- Lower interest rate
- More money you can borrow
- Longer time to repay
Cons:
- Risk of losing your asset
- More documentation
- Longer approval period
If you are confident that you can pay, providing collateral is fine. But if there is a risk involved, think carefully before providing your house or land.
What Should You Do?
Before you accept a long-term loan, ask the following questions:
- Do I own an asset that I can offer as collateral?
- Is the interest rate improved if I provide collateral?
- Can I pay on time without fail?
- Is the lender safe and trusted?
Always read the loan terms. Speak to the bank clearly. Don’t hide anything. Ask questions if you’re not sure.
You might or might not require collateral for a long-term loan. It is based on the kind of loan and how much you require. Secured loans are safer for banks, hence they charge less. Unsecured loans are simpler, but they could be expensive.
Choose the one that is best for your income and requirements. Borrow wisely, and pay back in time.