Loan Against Collateral: A Solution for Low CIBIL Score Applicants

A low CIBIL score can make it challenging to secure a loan from traditional banks, as it signals a higher risk to lenders. However, individuals with poor credit scores still have viable options, one of the most effective being a loan against collateral. This type of secured loan provides access to funds by pledging an asset as security, reducing the lender’s risk and increasing approval chances for borrowers. This article explores how loan against collateral works, the benefits, eligibility criteria, and the different types of collateral that can be used to secure a loan for applicants with a low CIBIL score.

Understanding Loan Against Collateral

A loan against collateral, also known as a secured loan, is a loan that requires the borrower to pledge an asset as security. The lender holds the asset as collateral until the loan is repaid in full. If the borrower defaults, the lender has the right to liquidate the collateral to recover the loan amount. Since the loan is backed by an asset, financial institutions are more willing to approve it, even for applicants with poor credit scores.

Types of Collateral Accepted for Secured Loans

Lenders accept various forms of collateral when issuing secured loans. Some of the most common include:

1. Gold Loan

A gold loan is a secured loan where borrowers pledge their gold ornaments or coins in exchange for funds. Many financial institutions, including banks and NBFCs, offer gold loans with minimal documentation and quick disbursals. Key Benefits:

Loan amounts up to 75% of the gold’s market value.
Lower interest rates compared to personal loans.
Instant approval and disbursal, often within a few hours.
No impact of low CIBIL scores on loan approval.

2. Loan Against Property (LAP)

A Loan Against Property (LAP) allows borrowers to pledge residential, commercial, or industrial property as collateral. The loan amount depends on the market value of the property and the lender’s terms. Key Benefits:

High loan amounts, up to 60-70% of the property’s market value.
Lower interest rates compared to unsecured loans.
Long repayment tenure of up to 15-20 years.
Available for both salaried and self-employed individuals.

3. Loan Against Fixed Deposits (FD)

Banks allow borrowers to take a loan against their Fixed Deposits (FDs), using them as collateral. Key Benefits:

Interest rates are 1-2% higher than the FD rate.
No processing fees in most cases.
Up to 90% of the FD value can be availed as a loan.
The borrower continues to earn interest on the FD while using the loan amount.

4. Loan Against Insurance Policy

Some lenders offer loans against life insurance policies where the policyholder can borrow against the surrender value of their policy. Key Benefits:

Lower interest rates.
No additional collateral required apart from the policy.
Borrowers continue to enjoy policy benefits while using the loan.

5. Loan Against Mutual Funds and Shares

Borrowers can also pledge mutual fund units or shares to secure a loan. The loan amount depends on the Net Asset Value (NAV) of the mutual fund or the value of shares. Key Benefits:

Quick approval and processing.
Loan amount up to 50-60% of the investment value.
The borrower retains ownership of the investments while availing funds.

How Loan Against Collateral Helps Low CIBIL Score Applicants

1. Higher Approval Chances

Since secured loans involve collateral, lenders are less concerned about the borrower’s credit score. This increases approval chances for individuals with a low CIBIL score.

2. Lower Interest Rates

Compared to unsecured loans, secured loans come with lower interest rates because the risk to the lender is minimized.

3. Flexible Loan Amounts

The loan amount depends on the value of the pledged asset, allowing borrowers to secure higher amounts based on their financial needs.

4. Longer Repayment Tenure

Loans against collateral typically offer longer repayment tenures, making EMIs more affordable for borrowers.

5. Helps in Credit Score Improvement

Timely repayment of a secured loan can gradually improve the borrower’s credit score, making them eligible for better loan products in the future.

Eligibility Criteria for Loan Against Collateral

While eligibility requirements may vary by lender, the general criteria include:

The borrower must be at least 21 years old.
A stable source of income is preferred for repayment assurance.
The collateral must be free from legal disputes.
The borrower must provide ownership proof of the asset.
Some lenders may have a minimum loan-to-value (LTV) ratio requirement.

Documents Required for Loan Against Collateral

Identity Proof (Aadhaar card, PAN card, Passport, Voter ID)
Address Proof (Utility bill, Rental agreement, Driving license)
Income Proof (Salary slips, Bank statements, IT returns for self-employed)
Collateral Documents (Property papers, FD receipts, Insurance policy, Gold valuation certificate, etc.)
Photographs (Passport-sized photos as required by the lender)

How to Apply for a Loan Against Collateral

Step 1: Choose a Lender

Compare interest rates, LTV ratio, and loan terms from various banks, NBFCs, and online lenders.

Step 2: Submit the Application

Fill out the loan application form online or visit the lender’s branch.

Step 3: Provide Necessary Documents

Submit the required KYC and collateral documents for verification.

Step 4: Asset Evaluation and Loan Approval

The lender evaluates the collateral’s market value before approving the loan amount.

Step 5: Loan Disbursal

Once approved, the loan amount is credited to the borrower’s bank account within a few days.

Risks and Precautions

While a loan against collateral is a great solution, borrowers should be mindful of the following risks:

1. Risk of Losing the Asset

If the borrower fails to repay the loan, the lender has the legal right to seize and sell the asset to recover dues.

2. High Processing Fees and Charges

Some lenders charge processing fees, valuation fees, and prepayment penalties that can increase the overall loan cost.

3. Loan Amount Restrictions

The approved loan amount depends on the asset’s market value, which may be lower than expected.

Conclusion

For individuals with a low CIBIL score, a loan against collateral is a viable financial solution, offering higher approval chances, lower interest rates, and flexible repayment options. By pledging assets such as gold, property, FDs, insurance policies, or investments, borrowers can secure funds even when traditional lenders reject their applications. However, borrowers should carefully assess their repayment ability to avoid losing the pledged asset. Comparing loan terms from multiple lenders and understanding the risks involved can help in making an informed borrowing decision.