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Collateral is a thing of value that a borrower can pledge to a lender to get a loan or line of credit; common examples of collateral include real estate, vehicles, cash and investments. Not only does collateral minimize the risk lenders are exposed to because it secures the financing, but it also can help borrowers access lower interest rates and higher loan amounts. If you’re shopping for a loan, credit card or another source of financing, consider whether pledging collateral is a feasible option. We’ll walk you through how collateral works, as well as common forms of collateral and the types of loans that require it. How Collateral WorksCollateral serves as evidence that a borrower intends to repay their debt. Requiring collateral for certain loans lets lenders minimize their risk by improving their ability to recoup outstanding debt in case the borrower defaults. Taking out a collateral loan, also known as a secured loan, typically involves a borrower giving the lender title to a specific piece of collateral. The collateral is often related to the use of the loan funds—as with a home mortgage or auto loan—but may also be more general, like cash, investments or other valuable assets. As a result of this arrangement, the lender has a claim to the collateral—called a lien—meaning that if the borrower defaults, the lender can seize the collateral and sell it to recoup the outstanding debt. For this reason, the value of the collateral must be sufficient to cover the debt if the borrower defaults. In cases where the value of the collateral is insufficient, the lender can initiate legal proceedings in an attempt to collect the balance. Types of CollateralThe type of collateral required is typically related to the type of loan it’s securing. However, collateral also can be other valuable assets. Here are the most common types of collateral:
What Types of Loans Require CollateralA collateral loan is one that is secured by personal property, cash, investments or real estate that has value sufficient to cover the outstanding debt. Not all loans are secured, but there are some loans that typically require the borrower to pledge collateral. Collateral will likely be required if you’re considering one of these financing options: MortgagesMortgages are one of the most well-known types of secured loans. When financing a home or other real estate, the buyer pledges that real estate as collateral so that the bank’s risk is limited in the case of default and subsequent foreclosure. While the owner holds the deed to the real estate, their title is encumbered by a mortgage that gives the lender the ability to foreclose on—and seize—the property if the borrower fails to make payments. Auto LoansAs with mortgages, most auto loans are collateralized by the vehicle being financed. In the case of a car loan, however, the lender holds title to the vehicle until the loan is paid in full. If a borrower defaults on the loan, the bank can repossess the car. Secured Personal LoansIn contrast to unsecured personal loans, secured personal loans require the borrower to pledge collateral to limit the lender’s risk. Though not all lenders offer this option, secured personal loans can make it easier for low-credit applicants to get approved. These secured loans can also help borrowers access lower interest rates or, perhaps, qualify for higher loan amounts. Secured Credit CardsIf you have a low credit score—or haven’t developed credit history at all—it may be difficult to qualify for a credit card. This can make it even more difficult to build a credit history. To address this issue, some banks and credit card companies offer secured credit cards. With this type of card, the bank extends credit equal to (or close to) the cash a cardholder places in an in-house account and pledges as collateral. Pros of Collateral LoansCollateral has a number of benefits that make it a helpful tool when applying for loans, credit cards and lines of credit. These advantages may make a secured loan a good financing option:
Cons of Collateral LoansStill, the mechanics of collateralized loans mean that a secured loan may not be your best option. Here are some things to consider before pledging collateral:
Can You Get a Loan Without Collateral?Collateral is a necessary element of many financing options—like mortgages, home equity loans and auto loans—but it is possible to get a loan without collateral. Unsecured personal loans, for example, provide borrowers an opportunity to access cash without having to pledge something like cash or investments as collateral. Likewise, most credit cards are unsecured, meaning that you can access a revolving line of credit without providing collateral. What are the 4 types of collateral?Types of Collateral to Secure a Loan. Real Estate Collateral.. Business Equipment Collateral.. Inventory Collateral.. Invoices Collateral.. Blanket Lien Collateral.. Cash Collateral.. Investments Collateral.. What is considered collateral for a secured loan?A secured collateral loan requires that the borrower use their assets (such as a car, house or savings account) as collateral to “secure” the loan. The collateral is a promise to the lender that if the borrower cannot repay the loan, the lender can take possession of that asset.
What are 5 examples of a secured loan?Types of Secured Loans. Vehicle loans.. Mortgage loans.. Share-secured or savings-secured Loans.. Secured credit cards.. Secured lines of credit.. Car title loans.. Pawnshop loans.. Life insurance loans.. What are the common examples of collateral on bank loans?5 Assets That Can Be Used for Collateral to Secure a Loan. Real Property. Using real estate assets or home equity as collateral when applying for a small business loan is a common approach. ... . Inventory. Another type of loan security is inventory. ... . Cash. ... . Invoices. ... . Blanket Liens.. |