What is Prime Security and Collateral Security in Bank Loan ?

What is Prime Security and Collateral Security in Bank Loan : Any Individual seeking loan from bank or any financial institution has to put some assets as security against the loan amount. Security provide protection to bank or lender against losses in case of default by the borrower. When a borrower fails to repay the loan, bank has right to seize the security to recover the dues from borrower.

There are generally two types of securities – Prime Security and Collateral Security.

Prime Security Vs Collateral Security

What is prime security in bank loan ?

Prime Security refers to asset created out of the finance extended to the borrower. Lender keeps that asset as prime security for securing the financed amount against any future default by the borrower. For Example, in case of housing loan,house is prime security that has been purchased out of the finance provided by lender bank. In case of term loan for plant and machinery, Plant and machinery will be prime security.

What is collateral security in bank loan ?

Collateral or secondary security is security asked by lender in addition to secure the loan when prime security is not sufficient to cover the loan amount in case of default by borrower.

Also Read : What is difference between Demand Loan and Term Loan ?

For example, Bank finance a term loan of 80 lakh for purchase of machinery to an industrialist.  He purchase  machinery worth 1 crore for his factory. Lender bank put a stipulation for residential flat as collateral security for above term loan. So Machinery purchase out of this term loan is prime security while residential flat is collateral security.

When a collateral security is required ?

In case of Cash Credit Limits, stocks and book debt are prime security. But in Cash credit , borrower may sell the stocks and books debts so bank take additional security (collateral) in form of immovable asset (building, land)  to secure the loan.

Collateral security is not required in case of housing loan, personal loan, car loan, etc.

Collateral security is not required in case of loans to micro enterprises and small enterprises upto 1 crore rupees which are cover under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme. Bank Loans without Collateral are known as collateral free loans.