Subscribe to the asset Yogi channel and press the bell icon. Be the first to watch Latest Finance Videos. Music Namaskar, my name is Mukul, and welcome to asset Yogi. Where we unlock finance knowledge. I have made a video earlier. About secured vs unsecured loans. In which we saw that if you take an unsecured loan. Like a personal loan, or you take a loan against a credit card.
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| Collateral Security – Explained |
So you do not have to deposit any security in it with the bank. But if you take a secured loan, such as a home loan Car loan or you take a loan for some other vehicle. It could be Gold loan loans, loans against property and there are also business loans in which we have to give collateral So in such a case, the bank keeps a security deposit from you. But the security that the bank maintains is of two types.
A prime security and collateral security. We often get confused in both. We use prime security and collateral security interchangeably. Our house has been mortgaged. it’s our collateral. No, this is a wrong definition. We’ll get to know it in clarity in this video. What is the difference between Prime Security and collateral Security?
Then you must watch this video till the end. Let’s go straight to the blackboard. Suppose you want to buy a house And the cost of this house is ₹ 1 Crore But you don’t have all the money. Let’s say you have Rs 20,00,000. you have 20 lakh cash, And for the rest of 80,00,000, you approach a bank. And you demand a home loan of 80 lakhs.
The bank says that we can give loans up to 80% at property price. But we have a condition. then only we will give you money Bank will give a loan of 80 lakh Rs But the bank will say that we have a condition. Until the time your loan payment is not completed, your house will remain in mortgage with us. So all your documents like title deeds will remain with the bank as a security. Any asset you buy on loan So the security that the bank keeps, we call it prime security.
This means that the asset you bought, the bank has mortgaged the same property Until the loan is paid off. So in this example, we talked about a house Similarly when you buy a car. or buy a bike Whenever you take a vehicle loan Or suppose you buy some machinery in your business. The bank also mortgages the machinery So it is also kept as prime security. If the bank mortgage the main asset in prime security
So what is collateral security I proceed with the machine example. Suppose you have taken a business loan and you bought some machinery for your business For example, the cost of machinery is Rs 1.5 crore The bank says that if you want a loan for the machine, we can give the loan. The bank will pass a loan of Rs 1.5 crore But the bank needs some security with it For security, the value of this machine is only 1.5 crores. But the bank always keeps some margin with itself. So the bank says that for a 1.5 crore loan we need at least 2.5 crore security. We need such assets whose value is at least 2.5 crores.
So 1.5 crore is not sufficient for security. The bank says that you give us additional security. So you can give your house worth Rs 1 crore as additional security. So you bought the machine for your business, that is prime security. And you are additionally providing the security of your home Is your collateral security. So collateral security is second security. Apart from Prime Security. So whatever asset you are buying. For whatever work you are taking the main loan. Apart from that the security you give. We call it collateral security. I think the concept of Collateral Security is now cleared well I will give you one more example.
By which you will understand what kind of security can be created. Let’s take an example of an education loan. When you take an education loan. Let’s say you took an education loan of ₹ 4,00,000. So the bank says Because this is not a high amount loan. If you are taking a loan of 4 lakhs So you give Prime Security of any of your guarantors Any of your blood relatives. Or your parents can be the guarantors. what does that mean By chance, if you did not get your job after education.
For some reason So whoever is the guarantor will repay your education loan That is your primary security. But in many cases, suppose the amount of education loan increases. Let’s say you take a loan of 15 lakhs. So in that case the Bank says. We also want collateral security. Meaning they also need additional security. In that case, the bank asks you to bring any of your immovable security. We can keep it as a Collateral Security Collateral security is additional security in this case also.
Prime security is a guarantor. So this was an example of an education loan. Let us now see what are the things that can be given as security. They can also be kept as prime security And it can also be kept as collateral security. What could these things be? It can be definitely or immovable property. Whether it is a residential property. Or a commercial property whether any industrial property, It is the decision of the bank whether they accept it or not. Bank can accept gold And financial securities if you have any FD, mutual funds or you have stocks and bonds, Many times collateral securities We can take the example of an education loan. So the bank can also accept FD instead of home.
If your parents have a large amount FD, suppose FD is of 15-20 lakh Rs So the bank can accept it as collateral similarly mutual funds can also be accepted. Stocks, bonds So it is the decision of the bank as to what it accepts as prime security. And what can it accept as Collateral Security? Sometimes the personal guarantee is also taken as the prime security. So whoever is giving the guarantee.
His assets are observed whether from his assets, his net worth, or income. Will he be able to repay that loan or not? If you are taking a loan for your business then the plant and machinery are kept as security. And your inventory means all your raw material, work in progress inventory the stock of finished goods, the bank can also keep these as security You are account receivable, the money that has to be received from your customer. That too can be kept as security.
So this is the main difference between primary security and collateral security. Collateral security is your additional security. For whatever work you are taking the main loan whatever asset you are buying is your primary security And the additional security you give as collateral security. So that’s all in this video, if you like this video then do like and share it.
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