What Is Collateral?
Collateral is an item or asset of monetary value that you might be willing to put up in order to secure a loan or funding. In short, collateral just serves as protection for a lender. Collateral assets are something of value a lender could take if you were ever to default on a secured loan.
Collateral is a guarantee that you’re good for the money you owe. But not all collateral is the same. Keep reading, as we delve into everything you need to know - from how it works, to examples and types of it, to the benefits collateral can offer, and more. If you’ve ever wondered: what does collateral mean, we’re covering it all here, sharing everything you need to know about collateral and lending.
How Does Collateral Work?
Collateral works because it offers a lender the security they may need to feel confident that a loan will be paid back. Should a borrower ever default on payments, the lender has the borrower’s collateral to use as an alternative form of repayment.
What this essentially means is that when collateral loans are established, a lender is given the legal right to seize assets in lieu of payment to recoup their money. Collateral is required on what’s known as “secured” loans.
An Example of Collateral
Depending on the loan type and the lender, there are many different types of collateral assets that may be acceptable to secure a loan. Collateral examples could include putting up a savings account or another property.
Benefits of Collateral For Lenders
There are many advantages of collateral from the lender's perspective. First and foremost, the biggest benefit is that a lender can feel confident and secure in the loan. There would be less hassle and it would be much easier for them to collect repayment even if a borrower could not continue making timely payments on the loan.
There are also benefits for borrowers. If you have less than stellar credit, collateral can improve the overall chances of your loan being approved. You may also qualify to borrow more money, and there is the potential of getting a lower interest rate than you might on an unsecured loan.
Types of Collateral
While there are many types of collateral that could be used to secure a loan, a few are more common than others.
- Savings Account - Your hard-earned savings account may not be readily available to offer up the cash you need to for a large purchase or investment. However, that nest egg may be enough to offer as collateral so you can secure that funding you’ve been looking for.
- Real Estate - Already own real estate? You
may be able to use it to get approval on a new loan.
- Vehicles - Classic or even paid-off cars can be a lucrative asset to own if you are applying for a secured loan.
- Equipment - Equipment that you own for a business can be used as collateral, too. Particularly if it’s high-value or industry-specific.
- Accounts Receivable - If you own a business and have established sales, your AR can be used as collateral for certain types of loans.
- Inventory - Inventory loans are widely used as collateral for businesses that are struggling with cash flow but have inventory on hand that will later be sold.
Types of Collateral Loans
Just like there are different types of actual collateral you can use, there are also different types of collateral loans that you may be interested in securing.
- Personal loans could be used for anything in your life. You could use them to remodel or upgrade a property, for a wedding or educational expenses or even for retirement purposes or travel.
Small Business Loans
- Small business loans can be used to provide much-needed capital to start, fund or grow a business. Business owners can use the money they borrow for hiring, equipment, training, inventory or a host of other operational needs.
Mortgage & Auto Loans
- Mortgage and auto loans can be used to secure properties or vehicles. Mortgage loans will have longer repayment time periods; 15- to 30-years is average. Auto loans tend to be 4-5 years.
By now you should have a good grasp on the definition of collateral. And you probably now understand that using collateral for secured loans can be a great way to get the financing you need to do any number of things. Understanding the ins and outs of this type of financing is important so you know if it’s something to further explore. Especially if you have had credit problems in the past or are concerned with getting a lower interest rate, a secured loan using collateral may be exactly what you’ve been looking for.