Importance of Security For Bank Loans

The loan repayment tenure is also limited to 3 years. The final cap is put by the lender after making the judgement on several relative factors.Point #3The Rate of Interest - Generally, the rate of interest charged by the lender is settled on the higher side. The element of logic applies here. When there is no security charged against the loan, the lender is on privilege side to offer loans on high-interest rates. The lender sees a high-interest rate as the security for repayments of the loans in time.

Banks lend money to the public, for various purposes, like purchase or construction of a home, for purchase of consumer goods like a TV, Music System, etc. Banks also finance businesses, both manufacturing and services. Apart from all these, they also extend personal loans to members of the public.This service provided by Banks, namely, financing, or more commonly called lending, is fraught with several inherent risks. Loan defaults may occur for more than one reason, including reasons beyond the control of the borrowers, like for example, in case of floods or a Tsunami that may wipe out the assets of the borrower, apart from rendering him incapable of restarting his business immediately. The most serious risk to Banks in the lending process is the risk of non payment of the loan by the borrower. Imagine a situation where none of the borrowers of Banks repay the loans availed of by them! This could lead to a collapse of the Banking industry!The current spate of Bank failures in America and elsewhere is, in good part, on account of borrower defaults. Whereas, in an ideal situation, every borrower repays the loan availed by him, from the Bank, in real life, this does not happen. Many a time, borrowers, both individuals and institutions, fail to keep up their repayment commitments, affecting the well being of the lending Bank. Sometimes, there are even genuine reasons why borrowers become defaulters.   This being the case, Banks invariably, have in place, norms and procedures that they follow before parting with money to a borrower. Banks examine and evaluate credit proposals, as to their viability and feasibility, both technically and financially, before taking a decision to grant a loan. Each loan is appraised individually to ascertain the soundness of the proposal and only then a decision to grant a loan is taken. Obtaining of security for loans is one of the safeguards that Banks exercise to secure their interests.Among the various precautions observed by the Banks to safeguard their interests in the lending process, is the obtention of security for the loan extended by them.   Definition of Security: Security, in relation to a loan extended by a Bank to a borrower, means, an asset, of any kind or description, having certain qualities, among them, monetary value, that can be possessed by the Bank, in the event of default, and applied toward repayment of the loan.   Having extended the loan to the borrower, Bank would naturally like to ensure that the loan is repaid with the interest thereon. That is, Bank would want to secure the loan. This is done by way of creating a charge against the asset financed by the Bank. INVESTMENT PROPERTY LOANS