Term Of The Day: Collateral

While applying for a home loan, the house that you pledge to the lender to secure the loan is the collateral. But, broadly, collateral is any asset that you pledge to a lender to secure a loan. 

PropGuide Explains Collateral 

Collateral is offered to ensure that the lender can protect himself if the borrower defaults on the interest or principal amount payment. Generally, the interest rates on loans secured with collateral are lower than the interest rates on loans secured without collateral. 

If you do not make your equated monthly installments (EMI) for a considerably long period of time, the bank will have claim over your house. The process in which the bank exercises its claim over your house is known as foreclosure. When you default on the payment, banks and financial institutions have the right to evict you from your house, sell it, and use the proceedings to cut their losses. The ownership of your home, in such cases, will be transferred to your lender. But, this, of course, depends on the conditions stipulated in the mortgage agreement. 

Typically, banks and financial institutions track the value of the assets borrowers offer as collateral, and adjust their actions according to it if the market value of these assets fall beyond a level. 

Check out PropGuide's comprehensive guide to real estate terms here.

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