Megha has taken a loan of ? 5 laths from the bank to purchase a house. The annual interest on the loan is 12% and the loan is to be repaind in 10 years in monthly instalments. Megha had to submit to the bank, documents showing her employment records and salary before the bank agreed to give her the loan. The bank retained as collateral the papers of the new house, which will be returned to Megha only when she repays the entire loan with interest. Analyse the above operation and suggest the name of the banking operation that has been involved here.
Answers
Collateral
Explanation:
The bank has granted a housing loan to Meghan to help her purchase her house. She has submitted income proof and given the house documents as collateral for the loan.
A collateral is nothing but an asset which a borrower is required to deposit with, or pledge to, a lender as a condition of obtaining a loan, which can be sold off if the loan is not repaid. So the bank would demand a collateral if you applied for a loan.
The bank will keep the property pledged to the bank and the documents will be with the bank. You won't be able to sell off the property until the pledge is released. If you pay off the loan in full, the pledge will be nullified by the bank upon closure of the loan. In case of default, the bank has the authority to sell the pledged property in order to recover the loan amount.