Collateral is an asset that a borrower submits to a lender as security. The lender has the complete right to permanently seize the collateral if a borrower defaults on repayments. He/she may sell the asset to compensate for the incurred losses. This claim on the collateral of a lender is called a lien. Collateral-based loans often have a lower rate of interest. This provides the borrower ease of repayment. The type and nature of collateral are often based on the type of loan you borrow. For example, if you take a home loan, the property itself is the collateral. Similarly, if you take a car loan, the car has to be written as collateral. Here are the most common assets used as collateral for taking loans:
- Real property One of the most common assets used as collateral for taking loans is home equity or real estate. This is especially true in the case of small business loans. Not only do borrowers apply for loans using real estate, but lenders approve the loan without hesitation as well. The reason behind this is the value of the asset given as collateral. In the specific case of real estate, it has a high value. Furthermore, real estate remains valuable over long periods of time and is the most widely available asset to use as collateral. However, using real estate as collateral is not without its risks. If you default on the loan and lose the property, your overall finances can be negatively affected. Furthermore, real estate is just one of the assets you can use as collateral under the term ‘real property’. Other options include cars, motorcycles, and equipment, among others.
- Cash Lenders are also open to taking cash as collateral. In this case, it is not an upfront cash payment, but rather the rights to a bank account. This type of collateral is more common when taking business loans, in which companies provide their business savings account as collateral to the lender. Many lenders wish to receive this type of collateral and for good reason. They do not have to go through the trouble of selling an asset to compensate for their loss. Cash is usually used as collateral for a savings secured loan. This type of loan is also called a cash-secured loan. It is also usually taken from the same bank that you have an account in. A savings secured loan is very low-risk for the bank as it can liquidate your account as soon as you default. This type of collateral grants a reasonable rate of interest which makes repayment simpler.
- Blanket liens Blanket liens have one major difference compared to other types of assets. The point of difference is that blanket liens are intangible. A lien is described as a legal claim to a wide range of assets. Documentation confirming this claim is attached as collateral to the loan application. If a loan is left unpaid, the lender can seize the business assets that are mentioned as part of the lien and recover their funds.
