Pledging, a form of borrowing, involves the borrower offering their asset as collateral in exchange for a loan. The asset's legal ownership remains with the borrower, but its possession shifts from the borrower to the lender. The lender regains possession of the asset once the loan is repaid. In the event of a default in loan repayment, the lender has the authority to sell the asset to recover the outstanding amount. Assets such as vehicles (commonly known as car pledge), shares, and even personal belongings can be used as collateral to secure a loan.
Motives for Seeking a Loan:
- Home Purchase: Loans have revolutionized the lives of individuals, especially those aiming to acquire property for their families. Applying for a home loan enables individuals to purchase a house.
- Financial Emergencies: Financial crises often arise unexpectedly, leaving individuals in desperate need of funds. Loans from banks or other financial institutions can provide a lifeline during such challenging times.
- Education: Education, a fundamental human need, is often beyond the reach of individuals from lower-income families. Education loans play a vital role in helping people access this basic necessity.
Considerations before Applying for a Loan:
- Credit Score: The borrower's credit score is a crucial factor in the loan application process. It represents the borrower's borrowing history and their track record of repayment. A good credit score indicates responsible borrowing.
- Interest Rate: It's essential to carefully review the interest rates charged by banks and financial institutions before applying for a loan.
- Processing Fees: Borrowers should be aware of any processing fees associated with their loan. This fee is payable in case the borrower misses the deadline for repaying an installment.
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