The role of collateral in two-wheeler loan approval

The role of collateral in two-wheeler loan approval

Loans by Team Drivio | 15 Feb 2023

Before applying for a loan, it’s advisable to get a proper understanding of the ins and outs to sound financial decisions. In case you plan to buy a new two-wheeler vehicle on a loan, you might be wondering about the collateral requirements. You can’t really prepare for a loan if you don’t know whether it requires a collateral asset, and what you need for it. 

We’ll discuss this in more detail soon, but thankfully, you don’t have to worry about collateral when getting a two-wheeler loan. As long as you meet the other relevant criteria, your loan will be approved. This article will help you get a better understanding of loan collaterals, why they’re needed, and whether you need one for a two-wheeler loan. 

What is loan collateral?

To understand the concept of loan collaterals, you first need to know that there are two types of loans - secured and unsecured. The term ‘secured loan’ comes from the fact that the borrower has to pledge a collateral asset, much like a security deposit. In the event of failure to adhere to the loan repayment terms, the lender would seize the pledged asset to make up for the loss. 

Unsecured loans are the ones that do not require you to pledge a collateral asset. You may be forced to pay back the loan through other means, but there won’t be a specific asset that the lender can seize. Thus, in simple words, a loan collateral is an asset against which you’re approved a loan, on condition that the said asset will be seized upon the non-repayment of the loan. 

What can you pledge as loan collateral?

The collateral asset you pledge against a loan must be something you own completely. It should also be of enough value to compensate for your failure to repay the loan and help the lender recoup the losses. Commonly accepted loan collaterals include:

  • Vehicles
  • Homes or other real estate properties
  • Jewelry
  • Insurance policies
  • Investment portfolios
  • Savings accounts

Other valuables may be eligible as loan collateral too, but these are the ones that people typically tend to pledge. Collaterals are typically needed for loans of significant value or particularly low loan interest rates.

Do you need a collateral for a two-wheeler loan? 

A loan taken for a two-wheeler is obviously large enough to require a collateral asset. This might make you wonder why we asked you not to worry about your two-wheeler loan collateral. 

Let’s get one thing straight - a two-wheeler loan (or even a car loan for that matter) is always a secured loan. No bank or NBFC would risk lending such a large sum of money without any means of ensuring that they can recoup the amount if you can’t pay it back. 

However, you don’t have to separately pledge an asset as collateral for your two-wheeler loan. The two-wheeler you buy with the loan itself serves as the collateral asset. Upon your failure to repay the loan, the lender reserves the right to seize and sell the two-wheeler. 

To sum up, a two-wheeler loan does require a collateral asset. You just don’t need to pledge an asset you already own, as your new two-wheeler already serves the purpose.

What’s the purpose of collateral in a two-wheeler loan?

Not sure why your new two-wheeler is locked as collateral when you take a loan for it? Well, think of it from the perspective of the lender. If, for some reason, the borrower is unable to repay the loan, the lender would be the one bearing the losses. Frankly speaking, a two-wheeler loan isn’t a small amount - it might mean a huge loss for the lender. 

The sole purpose of loan collaterals is to protect lenders from defaulting customers. It gives lenders an alternative way to retrieve their investments if something goes wrong. 

For such high-value loans, you’re required to pledge a collateral asset regardless of your CIBIL score. This is because even individuals with an excellent CIBIL score and a spotless track record may face a major financial disaster. That, in turn, might prevent them from being able to make the repayment. 

Other factors that impact loan approval

For major loans, the availability of a collateral asset directly influences loan approval. A secured loan would never be approved unless the borrower has a valid asset to pledge. However, apart from collateral, several other loan requirements are relevant too. 

Age limit

There’s a minimum and maximum age limit for two-wheeler loans. Individuals younger than 18 years or older than 75 years or retirement age aren’t eligible for the loan. However, the maximum age limit may vary a bit from place to place. 

Credit score

Of course, your credit score is crucial to your loan eligibility. Your credit score shows your financial stability and your track record on the repayment of past loans. A poor credit score may prevent you from getting the loan or result in a high-interest rate.

Status of employment

The lender will be verifying that you have the means to repay the loan. To be eligible for the loan, you must be either salaried or self-employed. In this regard, the company you work for matters too. Those working for well-established and reputed companies are more eligible due to their job security.

Work experience

While we’re discussing the loan requirements regarding employment, you should note your work experience is another relevant factor. Most lenders require you to have at least a year of work experience, and might require you to be working with your current employer for at least six months.

Take Away

Since a separate collateral asset isn’t necessary for a two-wheeler loan, all you have to do is make sure you meet the other requirements. Gather up the loan documents and apply for the loan. However, before finalizing a loan decision make sure to consider the terms carefully.