Significance of Collateral
Collateral refers to assets or personal property that you use to secure a loan. Collateral is money or property which is used as a guarantee that someone will repay a loan. For example, you typically secure a mortgage by pledging your home as collateral. If you default on a loan secured with collateral, the lender can seize the collateral and sell it to repay the debt. Other examples of loans secured with collateral include car loans and home equity loans.
- Advantages for the Lender –
If the borrower defaults on a loan secured with collateral, the lender can seize his property to repay the debt. However, lenders of unsecured loans must obtain a judgment before they can seize property. Moreover, lenders of unsecured loans cannot seize property that the borrower has used to secure another loan, so they typically don’t have access to many of the borrower’s major assets, such as his home or vehicle.
- A probability of Repayment –
A loan secured with collateral is a better investment for the lender because borrowers don’t want to lose their pledged property, so they are less likely to default on the loan. If a borrower has multiple debts and cannot afford his payments, he will typically make payments on the secured loans before he pays unsecured loans and other bills.
- Advantages for the Borrower –
If you have bad credit or limited income, lenders may be more willing to approve your application if you agree to pledge collateral. If you don’t have traditional collateral, such as a vehicle or home equity, some lenders may accept other forms of collateral, such as jewelry. Even if you have the credit and income to qualify for an unsecured loan, secured loans feature lower interest rates, and the lender may allow you more time to repay the loan.