Bond vs. Cash Collateral

In many cases, a person taking out a loan or performing another action that requires the placement of some kind of collateral will have to choose between taking out a bond or paying the collateral in cash. While placing a cash collateral on a loan makes little sense, there are certain instances in which this is actually cheaper and preferable to taking out a bond.

When you have to place collateral on something, cash can often be the most efficient -- and, in the long run, cheapest -- method of doing so. This is because, if the collateral is seized, then you will not have to pay for any transaction or repossession costs. In addition, you will not have to pay any fees associated with taking out a bond.

When taking out a loan, it makes almost no sense to put up a cash collateral -- unless, of course, you are taking out the loan merely to build up your credit rating, as is done with secured credit cards, which are done with a collateral of cash. In addition, it may be difficult to come up with the amount of cash required to meet the collateral.

The main advantage of a bond is that you do not need to pay the entire amount of the collateral. Rather, you will pay only a percentage of the collateral, and then have the rest of the collateral covered by a bondsman. For a person seeking a loan, issuing a bond for collateral allows them to secure the loan without putting their own property on the line.

The main disadvantage of a bond is expense. The person who will issue you the bond won't do it for free. This means that you will have to pay a nonrefundable fee, often a percentage of the amount that the bondsman is putting up. This can eat into your ability to pay back the loan and increase your chances of default. And, if you do default, the bondsman may be aggressive in collecting on the debt.