What is the difference between Prime and Collateral Security?

Prime security is an asset acquired by a borrower under a loan and it is the same asset that is offered to the lender as a security for the financed amount. The collateral security is one where the lender asks the borrower to provide extra security in addition to the prime security.

Collateral security is a secondary form of security that a borrower offers to a lender in addition to the primary security of the loan. It’s a safety net for the lender and a way for the borrower to access funds. If the borrower can’t repay the loan, the lender can take the collateral to recover the funds. Land & Buildings; Goods Documents of Title to Goods, Advances against Insurance Policies, Shares, Book Debts, Term Deposits, Gold, etc. The collateral securities may be in the form of The situation of a lender asking for collateral security when the lender feels that the prime security is not adequate to cover the dues in case of default by the borrower. The collateral security offered need not necessarily be in the name of the borrower. The assets in the name of the guarantor/s can also be offered as collateral security.

Illustrations of prime and collateral securities:

You have availed a housing loan of Rs.50 lakh from a bank to purchase a residential flat. The bank asks for the mortgaging of the same flat financed by it as a security.  Thus the flat mortgaged by you against which the bank has financed is called prime security.

Let us take another example of a residential flat mortgaged to a bank for a different purpose. The bank sanctions a term loan of Rs.1.50 crores to an Industrialist for the purchase of machinery worth 2.00 crores for his factory. The sanction terms of the loan stipulate that the industrialist has to offer the residential flat in his name worth Rs.1.00 Crore as collateral security for the above bank finance. Here, the machinery worth Rs.2.00 crore purchased through a bank loan is the prime security and the residential flat worth Rs.1.00 crore is the collateral security offered to the bank.

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