Collateral is an item of value an individual possesses like jewellery or real estate which can be accepted by the lender as security for provisioning of loans. These are termed as security since these can be used by the lender to recover the money lent as loan.
In case of a default in payment by the borrower, the lender can seize the collateral and sell it to make for the loan amount. Different types of loans accept different kinds of assets as collateral. The interest rates of loans secured through collateral are lower than the unsecured loans.
Points to remember:
- Personal loans secured by collateral must always be obtained from financial institutions which can be trusted.
- Personal assets like future paychecks, savings or investment accounts can also be used as collaterals.
- The loan amount depends on the value of your asset. The loan amount will either be less than or equal to the value of the collateral.
Example: If you take a car loan from a bank, then the car purchased becomes the collateral for the acquired loan. In case you default on the loan payment, the car may be seized by the bank to make up for the money lent.