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Collateral as the name suggests, is a type of financial instrument which helps you secure the loan against your asset. When you borrow the required amount, it is there in the documents that the lender can take anything and can sell it to recoup their money back. Collateral is an instrument which makes it possible for you to secure large amount of loan. Collateral loans make it possible to get large amount of loans and it also improves the possibility of you getting a loan.
When you’re pledging collateral, you will get a good rate as the lenders takes less risk. Collateral is a scheme in which lender is assured that even if the borrower doesn’t return the money, the lender will recover his amount by selling the collateral. We usually have to pledge an asset as collateral and then the lender has the right to take action which involves taking control of the asset you put up as collateral and probably selling it to recoup the money he lend in the first place.
Lenders also prefer collateral title loans as they want minimum hassle and they don’t want to be involved in a legal fight with you. Hence they prefer using the collateral as a way of taking the money back. Collateral is used as a safeguard to avoid any repayment issues. It is used as protection by the lenders to avoid losing their money.
Types of collateral
Assets which are accepted by the court of law serve as collateral and hence are in turn accepted by lenders. Lenders usually chose products which can be easily sold and hence they can easily recover money. Money which is in a savings account is good and hence is good collateral. Some other forms of collateral include:
- Real estate
- Machinery and equipment
- Insurance policies
Valuing the Assets
Lender will be picky while dealing with assets and you should make sure that he/she isn’t downplaying the value of your assets. In some cases, lender usually recognizes only some of your investment portfolio. There is a thing called loan to value ratio (LTV). If value of your house is $200,000, then you will get a loan of about $160,000. If a situation arises where you lose value on your asset, then you will have to pledge additional assets to cover the value. Bank or the lender
Types of loans
Collateral loans are of various types and are present in variety of places. They are usually used for business and personal loans. Businesses are usually required to provide huge collateral and their track record of profits is usually taken in to consideration. In insurance cases, you can avail policy and collateral at the same time.
Same case is with a financed home where lender will take away your home if you are unable to repay the whole amount. If you are using for a building estate, then the lender will hold the project as your collateral.