Collateral is defined as property or other assets given to a lender to secure the repayment of a loan. The borrower gives these assets to the lender, who agrees to sell them, usually at auction should the borrower fail to repay their loan. Below are some of the most common types of types of collateral:
This type of collateral is usually in the form of residential or commercial property that owners use to secure their loans. For example, suppose someone is taking out a home mortgage. In that case, the lender will typically require personal real estate like a condo as collateral if something happens and the borrower can no longer make payments on their loan.
Personal items may also be used as collateral in some cases. Items like automobiles, boats, and aircraft are often used to secure loan repayment. If you have a car or boat that is paid off, you can use it if you need to borrow money for something else with the stipulation that the asset will be sold in case of default on your loan payments.
If you own a small business, then this may also be used as collateral in some cases. Lenders will often loan money to small business owners and ask that the company shares, stock, or other parts of the business be placed into an account with the lender for safekeeping. In case of default on your loan, they can sell off any and all accounts your company owns until it has been completely repaid.
Anything from artwork to precious metals may be considered valuable enough to use as collateral in some cases. For example, if you have a rare piece of art that would fetch an extremely high price at auction, you could potentially use this asset to secure short-term pawn loans. The same could be said for metals like gold, silver, and platinum.
Intangible assets, such as patents or copyrights, may also be used as collateral in some cases. For example, if you have a patent scheduled to expire in six months and you need money now to help pay for its renewal, then the patent itself can be used as collateral. The lender would hold onto the patent until it expires and then possesses it. This type of collateral is not as common as the others mentioned above, but it is an option for those who own valuable intellectual property.
In some cases, life insurance policies may also be used as collateral. This is most commonly seen when a person takes out a loan against the policy itself. The lender agrees to hold onto the policy until the loan has been repaid in full, and then they will release the policy to the original owner.
Automobiles are a common form of collateral, especially when taking out a loan. The lender will typically ask for the title to the movable asset to be placed in their name until the loan is repaid in full. This ensures that they can take possession of the car if the borrower defaults on their payments.
Collateral refers to any asset a borrower offers to a lender as security for a loan. This asset can be anything from personal property to intangible assets like patents or copyrights. The value of the asset can vary depending on the size of the loan. The borrower offers to use the collateral to reduce their risk. If they default on their loan, they are essentially giving up the collateral until they have fully repaid it.