Lenders typically want some guarantee they will get back the money they provide to borrowers, and that is why they ask for collateral. Collateral is an asset of value that the lender can grab and sell if you fail to repay the debt as promised. Some financial institutions may require certain kinds of collateral -- such as real estate or cars -- for the type of loan they are providing. But for the most part, lenders want collateral that is likely to appreciate in value over time and will not be too much of a hassle to liquidate if need be.
Real estate collateral is very near and dear to the hearts of many lenders. Financial institutions love it when borrowers use property to guarantee a loan because it cannot be moved. The borrower can't decide to skip town and relocate a house in the middle of the night. Mortgage lenders require that the house a borrower is either purchasing or borrowing money against be collateral for the mortgage loan. Mortgage lenders usually will not accept other types of collateral.
Some lenders are willing to accept cars as collateral with the understanding that if the borrower is late on his payments, the lender can keep the vehicle. These types of loan are sometimes referred to as auto title loans, since the lender holds the title -- which is proof of ownership -- until the debt is repaid. Borrowers can only use a car as collateral for this type of loan if they own the car free and clear with the legal title in their possession. Financial institutions that provide loans for vehicles also will secure the loan with the car as collateral. They reserve the right to repossess the car if the borrower fails to repay the car loan as promised.
Loans against securities are most often provided by stockbrokers, although a growing number of banks are in this business too. Stockbrokers will allow you to borrow up to 50 percent of the value of stocks or mutual funds in order to purchase more shares. Banks that accept stock as collateral for loans do not have restrictions on how the money is used.
Certificates of Deposit
A bank will lend you money against your CDs. For example, a bank might loan you $10,000 and hold a $10,000 CD you have at the bank as collateral. You would not be able to access the money in that bank account until the loan is repaid. This type of collateral loan is most commonly used by people with poor credit who are trying to rebuild a positive loan payment history.
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