1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

Collateral Basics

Define Collateral for Loans

By

To get a loan, you may be required to use collateral. Learn more as we define collateral, see why it’s helpful, and examine how it’s used with loans.

Definition

Define Collateral: Collateral is something of value - an asset or property - that you pledge when getting a loan. If you don’t repay the loan as agreed, the lender can take your collateral and sell it.

Types of Collateral

You can use a variety of assets as collateral. Physical assets like houses and cars may be used, and intangible assets like bank accounts and investment holdings might qualify depending on your loan.

Some loans define collateral as the thing you’re borrowing for. For example, when you buy a home, the home you purchase is often the only collateral available. Auto loans are similar.

Other loans allow you to choose from or propose a broader range of assets. For example, small business loans may require collateral, and you can negotiate which assets are fair game if things don’t work out.

Why Use Collateral?

If you risk losing something, why pledge it as collateral? It may be because there’s no other way to get a loan. Banks won’t lend you enough money to buy a house unless they can take the house back and sell it when things go bad (this is known as foreclosure).

Lenders want you to have some skin in the game. They’re taking a risk so they want you to risk something too. Large loans and borrowers without a solid credit history are most likely to need collateral. Lenders define collateral requirements; if you can’t meet them you may have to pay higher rates or find another lender.

Loans Without Collateral

It is possible to get loans without pledging collateral. These are called unsecured loans or signature loans, since there’s no collateral to protect the lender. All they can do is ding up your credit if you don’t repay. Credit cards are a common form of unsecured loan, and peer to peer loans are often unsecured as well.

You might also be able to get a loan if somebody will co-sign for you. They'll promise to repay if you end up defaulting.
  1. About.com
  2. Money
  3. Banking / Loans
  4. Loans
  5. Collateral for Loans - Definition, Types & Why to Use

©2014 About.com. All rights reserved.