Secured loans require collateral. Here are some types of secured loans.
Auto loans
Auto loans are a type of debt that may involve collateral. In this type of loan, the vehicle generally serves as the collateral. If the borrower fails to repay the loan, the lender may be able to repossess the vehicle to recoup some of the money for the loan.
Mortgages
Mortgages generally require collateral. In this type of loan, the home or property itself is used as collateral. Should the borrower default on the mortgage, the lender may be able to foreclose on the home or property.
Home equity lines of credit
Home equity lines of credit (HELOCs) typically use a borrower’s home as collateral. The money from a HELOC is often used to pay for things like home renovations and improvements.
Like credit cards, HELOCs are an example of revolving credit. With a HELOC, a borrower can draw from a revolving line of credit, repay it and then draw from it again when they need more funds.
Home equity loans
Home equity loans are similar to HELOCs in that they both typically use a borrower’s home as collateral. Here’s one major difference: With a HELOC, a borrower is issued a revolving line of credit to draw from—but with a home equity loan, they’re provided with a lump sum to pay back over a fixed term.
Secured credit cards
If you have new credit or poor credit, secured credit cards might be easier to qualify for than unsecured cards. And with responsible use, a secured card can help you build or rebuild your credit history. With these types of loans, a cash deposit is used as collateral to open the account.
Business loans
Business loans, which can be used for things like buying equipment or funding company projects, are another type of loan that may require collateral. In this case, collateral may include assets like inventory or land.
FAQs
Collateral is an asset—like a car or a home—that can help borrowers qualify for a loan by lowering the risk to a lender. Secured loans typically require collateral; unsecured loans usually don't. Auto loans, mortgages and secured credit cards are examples of secured loans.
What is collateral with an example? ›
Collateral is an asset or form of physical wealth that the borrower owns like house, livestock, vehicle etc. It is against these assets that the banks provide loans to the borrower. The collateral serves as a security measure for the lender.
What is the simple definition of collateral? ›
As a noun, collateral means something provided to a lender as a guarantee of repayment. So if you take out a loan or mortgage to buy a car or house, the loan agreement usually states that the car or house is collateral that goes to the lender if the sum isn't paid.
What is an example of collateral description? ›
Collateral in the financial world is a valuable asset that a borrower pledges as security for a loan. For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan. For a car loan, the vehicle is the collateral.
What is collateral capital? ›
Capital is the amount of money that an applicant has. Collateral is an asset that can back or act as security for the loan. Conditions are the purpose of the loan, the amount involved, and prevailing interest rates.
What is an example of something you can use as collateral? ›
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 some example sentences for collateral? ›
Most people here cannot borrow from banks because they lack collateral. Many people use personal assets as collateral for small business loans. There is collateral available to be sold if the loans default.
What qualifies as collateral? ›
In lending, collateral is typically defined as an asset that a borrower uses to secure a loan. Collateral can take the form of a physical asset, such as a car or home. Or it could be a financial asset, like investments or cash. Lenders may require collateral for certain loans to minimize their risk.
Does collateral have to be paid off? ›
You can lose the collateral if you don't pay the loan back.
The biggest risk of a collateral loan is you could lose the asset if you fail to repay the loan. It's especially risky if you secure the loan with a highly valuable asset, such as your home.
Can you use your house as collateral for a loan? ›
You can also use a house you own outright as collateral on a second home or investment property. Or you can use an investment property as collateral for a primary residence. Banks will look at real estate collateral favorably as property generally holds its value and would allow them to make back losses more readily.
Some common types of collateral include real estate, automobiles, stocks and bonds, jewelry, and artwork. In general, any asset that has value and can be easily liquidated can be used as collateral. The primary purpose of collateral is to provide a level of security for the lender.
How do you identify collateral? ›
Collateral can be a physical asset, like a car, or a financial one, such as cash in a bank account. Collateral is often the very item being secured with the loan. For instance, mortgage loans are typically collateralized by the homes these loans fund.
Which of the following best defines collateral? ›
Collateral is an asset pledged by a borrower, to a lender (or a creditor), as security for a loan.
What are the 5 C's? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
Is collateral a good idea? ›
Good if Your Credit Needs Work
That's because collateral reduces the risk to the lender, which may make them more likely to approve your application. If you miss payments or can't pay back your loan, they can use your collateral to recoup their loss.
What habit lowers your credit score? ›
Having Your Credit Limit Lowered
Recurring late or missed payments, excessive credit utilization or not using a credit card for a long time could prompt your credit card company to lower your credit limit. This may hurt your credit score by increasing your credit utilization.
How do banks determine collateral? ›
The term collateral value refers to the fair market value of the assets used to secure a loan. Collateral value is typically determined by looking at the recent sale prices of similar assets or having the asset appraised by a qualified expert.
Is collateral a good thing? ›
Collateral loans are usually easier to qualify for than unsecured personal loans, as the collateral reduces the lender's risk. Lower interest rates. Since these loans are secured with collateral, interest rates can be lower than those on unsecured loans.
