If you are required to provide collateral as part of your loan, you may also need to offer a proof-of-collateral letter to the lender. The proof-of-collateral letter acts as a legally legitimate document in which the borrower describes in precise detail the specific nature of the collateral they are offering for the loan in question. You can write a proof-of-collateral letter using a few relatively straightforward steps. You can also use a letter of collateral sample as a template to help streamline this process.
Writing a legally valid proof-of-collateral letter requires the borrower to identify in precise detail the lender they are borrowing from, as well as the asset they are offering as collateral. Failure to provide the appropriate relevant information could cause the letter to be rejected by the lender.
The Basics of Proof of Collateral
If you are planning on borrowing a sum of money from a bank or the lender, situations may arise where you are required to provide a form of collateral to secure the loan. Collateral can take a variety of forms and is generally some tangible asset with a value that is equitable to the size of the loan in question. The proof-of-collateral letter acts as the borrower's acknowledgment that the asset in question will be used to "repay" the loan in the event that they default on their original obligation.
The proof-of-collateral letter is considered a legally recognized document which the lender can use against you in the court of law if such a need arises. For example, if a borrower defaults on their loan and then refuses to offer up the original collateral, the lender can use the proof-of-collateral letter as part of a legal suit in order to ensure that the borrower does transfer the asset in question.
Information to Include Within the Letter
In order for a proof-of-collateral letter to be accepted by a lender, it must include a variety of information relating to the loan in question as well as the asset identified as collateral. In the event that the borrower has been assigned a specific loan application number, this information will likely need to appear in the letter. Similarly, the letter should include all pertinent identifying information for the lender, such as their name, address and any specific personnel involved in the process. This identifying information will help ensure that the lender can defend against an argument that they are not the legally entitled recipient of the collateral asset.
After this identifying information has been included, the borrower will commonly be required to describe in specific detail the collateral asset. In the event that the asset carries with it a title, a copy of the title will commonly be required in combination with the letter. Similarly, items that have an appraised value such as art or antiques will need a valid appraisal letter included with the proof-of-collateral letter. Many of the examples of collateral letters found online today will include prompts for this information. These can provide an excellent point of reference for future borrowers.
Other Relevant Considerations
Borrowers should remember that the proof-of-collateral letter is fully enforceable by the law. With that in mind, these documents should be carefully drafted in order to ensure that the borrower is fully aware of what they will be required to offer back to the lender in the event of non-payment.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.