Features of Collateral

Every bank or financial institution asks for collateral while giving loans as these institutions want some security before granting loans to its customers. However not all collateral’s are good and utmost care should be taken before taking asset of borrower as collateral, given below are some of the features of collateral –

  1. Collateral should be saleable, so for example a land which is in city can be easily sold rather than a land which is located in interior forest or area which is inaccessible.
  2. Another feature of a collateral is that price of the asset should not be subject to large price fluctuation, so for example if a bank has option to take shares or land as collateral then bank should take land as collateral because the prices of shares fluctuate much more than the value or price of land.
  3. Collateral should be easily transferable because in case of default by the borrower if financial institution or bank has to sell the property mortgaged then it is better if that asset can be sold or transferred to bank without going through strict legal formalities as it will save lot of time and money for the bank.
  4. Collateral should be one whose value can be easily ascertained because without knowing the true value of security banks or financial institution would end up giving more loan than warranted by that security which is taken as collateral.

Above features are not exhaustive as each loan and security is different from other and therefore before granting loan the banker should exercise his or her own judgment and experience as far as collateral is concerned.

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