We all know how difficult it is when we don’t have enough money to get our business running in the market and stay ahead in the competition. To stay on track, every business needs a loan. These business loans will be the saviors and will fulfill the needs of the businessperson by pushing it forward. It is never too late to take up a loan, but few lenders will give loan only when the borrower pledges an asset as collateral.
Let us first know what collateral is.
Collateral is an asset put as surety to secure a loan. This surety will give the lender a clarity whether you will repay the loan amount or not. Lenders do not wish to risk by giving a huge amount of loans to the borrowers and not getting the money back on time. So, that is the reason they ask to pledge an asset with them. With the asset being in the hands of the lender, if the borrower defaults the payment or misses out a few, then the lender has all the rights to take a legal action i.e. seizing of the asset. This process will make the lender get paid back his money even though the borrower misses out the payment. Pledging collateral not only benefits the lenders but also the borrowers are benefitted. By giving lenders a surety on paying the loan amount, they will have a chance to get low-interest rates, can take large borrowings or get money worth the value of the asset.
So, you might get a doubt if it is necessary to put collateral in order to get a loan. This depends on the type of business loan that you are taking, creditworthiness, the amount taken, and the terms and conditions of the lender. Few lenders do not take up any collateral for the loan taken but they need a guarantee from the borrower that they will make the payment on time and not miss them. By defaulting a payment, it will affect the credit score negatively leading to a problem in taking further loans, and the lender can also take any legal action. Let anything be as collateral or personal guarantee, you should be sure of all the collateral terms and conditions before signing on the dotted lines.
How much collateral is required to get a loan?
Collateral to be pledged depends on various factors. Firstly, it is based on the amount that the borrower requires, if he requires more amount, then the value of the asset required to pledge will also be more. The smaller loan amount will generally not require any collateral, but the lenders require a guarantee from the borrower that they will make the payment on time. Borrowers with poor credit scores or low credit scores can also get these loans by pledging their assets and with timely payments, the credit score can also be improved.
So, the pledging of the assets totally depends on the lender from whom you are taking the loan. Even if you are pledging an asset or not, you need to be clear with all the terms and conditions of the loan application. If there is anything that you don’t understand then there are representatives who are ready to help you with all the doubts.