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What is Collateral?

Malcolm Tatum
By
Updated May 16, 2024
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Borrowing funds often requires the designation of collateral on the part of the recipient of the loan. Collateral is simply assets that have been pledged by the recipient as security on the value of the loan. In the event that circumstances make it impossible for the recipient to repay the loan, ownership of the collateral is transferred to the entity that issued the loan in order to settle the debt. Here is some information about the different types of assets that may be used as collateral in different situations.

One of the most common examples of a collateral loan is with real estate purchases. In many cases, the property that is being purchased with the mortgage is held as collateral for the duration of the loan. Essentially, the financial institution that grants the loan retains interest in the property until the mortgage is paid in full by the homeowner. The mortgage holder must approve any changes in ownership of the property as long as there is an outstanding balance on the loan. Once the debt obligation is discharged, the mortgage holder considers the business arrangement to be concluded and releases all claims to the property.

In like manner, many finance companies will use a newly purchased vehicle as the collateral on the loan used to purchase the car. This provides the finance company with the right to take possession of the vehicle if the owner defaults on the loan for any reason. Generally, companies that finance car loans will only finance what is understood to be the current market value of the vehicle. This helps to ensure that the collateral held on the property is sufficient to recoup any losses that result from the default.

Other assets can also be used as collateral on cash loans. For example, jewelry and securities that have a certified value may be held as collateral until the loan is repaid. In some cases, rare antiques may be accepted as collateral. Depending on the circumstances, just about any asset that is clearly owned by an individual may be used as collateral, as long as the entity that makes the loan is willing to accept the asset as being sufficient to guarantee the loan amount.

Providing collateral usually does not mean surrendering possession of the asset that is used as collateral. However, the borrower is covenanting to retain control of the asset for as long as it takes to repay the loan. This helps to provide the lender with a reasonable amount of confidence that the investment made in the borrower will be recouped, either through the systematic repayment of the loan, or by taking possession of the collateral.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By anon356276 — On Nov 23, 2013

"if you borrowed money with a collateral then he lost your collateral do you have rights to let them change it?"

They do not take on them the collateral, so they could not lose it. So your question is void.

By anon346656 — On Aug 30, 2013

I had bought a house and lot through bank financing, the bank had paid the owner so I was able to transfer the title in my own name and that served as collateral of my bank loan, but I still need to pay in installment basis as stated in the promissory note the previous owner cash receivables of the amount of the property I bought, but she demanded a full payment of the cash receivables. What are my legal rights? Do I have the right to enjoy and occupy the property? Please help.

By anon147776 — On Jan 30, 2011

I own a mobile home and an acre of land, can I use that as collateral to purchase a house.

By anon147316 — On Jan 28, 2011

if you borrowed money with a collateral then he lost your collateral do you have rights to let them change it?

By anon106781 — On Aug 27, 2010

fooledagain, i think you can claim that the property your husband has mortgaged is 50 percent yours and 50 percent is his, so he can't mortgage more than his share without your permission, so i think you have a good chance to save your part of the property.

By fooledagain — On Apr 13, 2009

My husband took a business loan of $150k about 3 years ago and used our jointly owned home as collateral. I had no knowledge of the loan until a year ago. I never signed any papers. Shouldn't I have had to agree to this loan as the house is half mine?

His business is shaky and has $95k left on the loan. Do I have recourse?

I have 3 kids, 2 in college, work full time and could be displaced d/t a decision that was not mine. Do I have legal rights that if the home is sold, that he gets half minus the amount of the loan?

Thanks

By mdt — On Jun 03, 2008

I've heard of retirement plans being used as collateral on what is called a hardship loan, but I am not familiar with going this route on a purchase of this nature. Personally, I would be somewhat leery about this option. Have you talked with your banker to see if this is even a possibility? The retirement plan may not be acceptable as collateral. Also, check with the retirement plan administrator and see what they have to say.

By superstar — On Jun 02, 2008

I have bad credit, need a car. Went the traditional/normal route but bank offered loan for 60 months at 19%. a friend suggested asking a bank to use my retirement (403b) as collateral for a car loan. Do banks do that, never heard of it? What are the pros and cons?

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
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