When taking a loan, banks and financial institutions need assurance that the borrower will repay the money. This assurance comes in the form of security. Security is an asset or a guarantee that a borrower provides to the lender to secure a loan. Security can be of two types: primary security and collateral security.
Primary security is the main asset that is being financed through the loan. It is the direct security against which the loan is given. If a borrower fails to repay the loan, the lender has the right to take possession of this asset and recover the money.
For example- If you take a loan to buy a car, the car is the primary security. This means the car is the main asset the bank is financing. If you don’t repay the loan, the bank can take the car to recover the money you owe.
If a person takes a home loan, the house itself is the primary security.
If a business takes a loan to buy machinery, the machinery becomes the primary security.
In a car loan, the vehicle being purchased is the primary security.
Collateral security is an additional asset or guarantee provided by the borrower to secure the loan. It acts as a secondary protection for the lender in case the primary security is not enough to recover the loan amount.
For example- If you take a loan to buy a car and use your car as primary security, you might also give your house as collateral security. This means if the car isn’t enough to cover the loan, the lender can take your house to recover the money.
A person takes a business loan and offers their property as collateral.
A student applies for an education loan and provides fixed deposits as collateral.
A company takes a loan and pledges its shares as collateral.
| Basis | Primary Security | Collateral Security |
|---|---|---|
| Definition | The main asset financed by the loan | Additional asset given as security |
| Purpose | Directly linked to the loan amount | Acts as a backup guarantee |
| Example | House in a home loan, car in a car loan | Property, fixed deposit, shares |
| Ownership | Remains with the borrower | May be pledged or transferred to the lender in case of default |
| Loan Recovery | Lender first recovers loan from primary security | Used only if primary security is insufficient |
Reduces risk for lenders: Banks and financial institutions feel secure while lending money when they have assets as security.
Easier loan approval: Borrowers with strong primary and collateral security find it easier to get loans at better terms.
Lower interest rates: Loans backed by collateral usually have lower interest rates as they carry less risk for the lender.
When the loan amount is high and the primary security alone is not sufficient.
When a borrower has a low credit score, banks may ask for collateral.
When taking business or education loans, banks often demand additional security.
| Category | Details |
|---|---|
| Primary Security | The main asset financed by the loan, directly linked to the loan amount. If the borrower defaults, the lender can take possession of this asset to recover the loan. |
| Collateral Security | An additional asset or guarantee provided to secure the loan, used as backup if primary security is insufficient to recover the loan amount. |
| Examples of Primary Security | House (home loan), car (car loan), machinery (business loan). |
| Examples of Collateral Security | Property, fixed deposits, shares (business or education loans). |
| Difference | Primary security is the main asset financed, while collateral is additional security, often pledged or transferred to the lender in case of default. |
| Importance | Reduces risk for lenders, aids easier loan approval, and may result in lower interest rates for borrowers. |
| When is Collateral Required? | For high loan amounts, low credit scores, or when business/education loans are involved, collateral is often necessary. |
Understanding the difference between primary security and collateral security is important for anyone taking a loan. Primary security is the asset directly financed by the loan, whereas collateral security is an additional guarantee that helps reduce the lender’s risk. Knowing about these securities can help borrowers plan their finances better and negotiate better loan terms.
We understand that getting a loan can be very stressful with confusing documents, unclear communication, and various other challenges. That is why we take care of your loan application process, saving you time and hassle by handling the paperwork and communicating with the loan providers.
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Yes, certain loans like personal loans and some business loans do not require collateral security, but they may have higher interest rates.
The lender will first try to recover the loan amount by selling the primary security. If that is not enough, they may use the collateral security.
Yes, many banks and NBFCs offer gold loans where gold jewelry is used as collateral.
An unsecured loan is a loan given without any collateral security, such as personal loans and credit card loans.
Yes, loans with collateral security often have lower interest rates compared to unsecured loans.
Yes, in some cases, banks allow collateral security in the name of a family member, such as parents or spouse.
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