People considered both primary and collateral security one term. But actually, there is a difference in it. Do you the difference? What does it mean? let me tell you the difference between primary security and collateral security. First of all, we need to carefully examine and understand what is security?
In this article, we discuss security. Difference between primary and collateral security. What are their definitions? What is collateral security meaning?
What is security:
security means to protect yourself by taking precautionary measures to become safe and protected. Security departments include security guards, security check posts, security measures. In the business, the security department is called business security.
While in the different departments there are different meanings of security. In a bank, the security is to give loans to its customers. One of the vital functions of banks is to provide loan and advances payments to their customers. In this way, it increases the bank’s backbone strength. It was only possible when the bank work on the quality of its loans as well as its quantity in advance. But the position of the banks nowadays is different today.
Nowadays the security system of banks changes. One bank has a large number of branches in different countries or different cities of the country it cannot give loans or advance without gain of security in one form or different terms.
Security is a type of silence. If one can not pay their debts then the bank takes the security items. For example, property, house, car, etc. security is insurance in case of emergency happens. When the payments are not paid by the customer, banks have a right to claim the approval of the asset of the borrower.
In the bank, security is divided into two types one is primary security. The other one is collateral security. If any need loan from the bank and in return give some security to the banks in case of emergency happens. Nowadays this is the rule of every bank in the world to give loans and advances to the customer.
Loans also have different types to give to the customer. One is a secured loan and the other one is an unsecured loan. A loan is an agreement that occurs between two parties the lender gives money to the customer and the borrower gives his asset to return the money or property along with the interest of the lender is called a loan.
In a secured loan it is compulsory to give an asset to the lender to sell the property if the borrower is not able to repay the loan is called a secured loan. For example, construction property, factory, etc. In a secured loan the rate of interest is low and the amount borrow is very high. The risk of loss in a secured loan is very less. The basis of a secured loan is collateral security.
In an unsecured loan, there is no need for the borrower to give some physical things or assets in return for the loan, this loan may be an educational loan. If the customer does not pay their loans in time it will create problems in the future. A bad history record of the customer was noted. In the future when he needs a loan the history affects their loan. No bank gives a loan to that customer. The asset is not compulsory in secured loans. While the amount of loan is low but the interest on it is very high. The loss of risk is also high.
Significance of the asset and collateral security:
In a secured loan the amount of loan is high but the rate of interest to the lender is very low. It is an advantage for the borrower it has a long time to pay their loans, debts. Even if a borrower has a low source of income, they easily repay their loans. Secondly, if the borrower has a low source of income or limited income. There is several financial companies are hesitated to provide a loan but if their history of repaid loan on time is good then the lender will be able to provide a loan in the future.
For the lender asset or collateral reduce the risk with default loan. If the borrower is not able to pay the loan on time so it gives assets as a security emergency to the lender will his property to compensate for the loss that occurred. So to not lose his guaranteed security he will need to pay the payment on time.
Types of security:
There are two types of security. One is primary security and the other one is collateral security. Let’s start with their definitions. Why these are required?
The primary security is directly related to your business. when the borrower tends to take a loan from the lender the agreement signs between these two parties. Borrowers give the asset to the lender about their property. Primary security is the one that can be fund. For example, when you take a loan of 40 lac to build a factory you have to give an asset to that factory as security or you take a loan for a car so the car is primary security. In simple terms, primary security is the asset of the finance provided by the lender.
Types of primary security:
Primary security has two types when is personal security and the other one is impersonal security. Let’s discuss these two types. Primary security is deposited by the borrower to cover its main loan or advance.
What is personal security:
Personal security can protect people, their important information, an asset to reduce the chance of risk with the help of the organization, reduce the harm to the people information. When the borrower made the personal advance then the borrower can pay the advance which he gave his asset at the time of agreement.
In personal security, the lender has a full right to act against the borrower when not able to pay their debts or non-fulfillment according to the agreement.
What is impersonal security?
Impersonal security is the one when an agreement is established by the way of the grantee over the borrower’s permission such as book debts, receivable bills. When the defaults occur, the bank has the authority to disclose the impersonal security or investigate according to their methods.
Collateral security is those securities that are other than personal security given which are kept under security for advance, loan. It is the third party involved in the agreement. For example, take a loan for a house and for that loan compensation give jewelry or something else for the security of the loan.
In collateral security, if the bank feels that the primary security is not enough for the security of the loan, if loss happens to cover the risk of loss in case of emergency it will ask for another security called collateral security along with primary security. It also includes a third party in the agreement.
When a person takes a loan of 20 lac for the start of business. So, the bank to avoid the loss of risk ask the borrower to give some security like flat, property, jewelry as collateral security. The banks have certain rules not no obtain collateral security when the loan is up to 30000. But when above this amount then will be a mutual agreement between the bank and the borrower.
Collateral security is another than primary security. It is called secondary or intermediate security for the debts. collateral security is direct or indirect.
Direct collateral security:
Collateral security that is gained by the borrower himself is called direct collateral security. For example, flat, property, etc.
Indirect collateral security:
The collateral security in which a security is provided by the third party to secure a customer account is called indirect collateral security.
Why collateral security needs?
Collateral security is not needed when the borrower takes a housing loan, factory loan. It is only needed when the borrower takes a loan in the form of cash. In a cash loan when the borrower becomes default is compensated by the sale of stocks and book debts. So in addition to primary security collateral security is needed in terms of immovable property to secure the loan.
Collateral free loan?
Collateral free loans are those loans given to the borrower without any collateral or primary security are called collateral-free loans. This is the new policy provided by the (CGTMSE). Its basic purpose is to resolve the difficulties that enterprises face or to improve their development.
Benefits of collateral loan:
- No third party is required in a collateral-free loan
- Payment time is flexible so the borrower has maximum time to repay their loans.
- No default history or track is needed for the borrower
- The minimum rate of interest
- Easy proceeding application.
In this article, we discussed what is primary and what is collateral security. Banks give loans based on these two securities. To avoid the risk of loss. When the borrowers are not able to pay their loans then the bank has a legal right to sell the primary security kept as security to compensate the loss. We see the difference between direct and indirect collateral security, what is the personal and impersonal security.