Definition
Collateral
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A collateral refers to assets that are pledged by a borrower in order to secure a loan.
This effectively means that all types of loans that are structured with collateral are essentially secured loans.
Sometimes, certain types of loan do not require collateral to be approved. But a borrower providing it can usually mean better terms and interest rates as the risk of loss by the lender.is greatly reduced.
Should a borrower default, the lender would just repossess the collateral asset and sell them to settle the outstanding debt.
This is also why property loans are often the lowest priced products offered by banks in terms of interest rates.
Some types of loans require collateral by default.
Some examples include:
- Home loan
- Equipment loan
- Car loan
- etc
The security for the debt is the property in which the funds are used to acquire.
When a borrower is unable to obtain a level of loan from a lender, sometimes offering collateral can easily get the bank’s approval.
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