Collateral

Collateral

Lenders take a risk to lend you money. Therefore, they want to be sure that their money is secure.

Collateral is security you provide the lender.

• Example: You pledge an asset you own, such as your home, to the lender with the agreement that it will be used as repayment if you cannot repay the loan.

A guarantee is a form of collateral.

• Example: Cosigning is a form of guaranteeing a loan; if a person with no credit history asks another person to cosign a loan, the cosigner is equally responsible and has to pay if the borrower defaults.

In a secured loan, the borrower offers collateral for the loan.

• Example: Collateral is given up to the lender if the loan is not paid back. Home equity loans and home equity lines of credit are examples.

An unsecured loan is not backed by collateral.

• Example: Credit cards are often unsecured loans although some are secured. Other examples include personal and student loans.

An asset is something valuable that you own, like a car, savings and investment accounts, and property such as your home.

Can you think of other assets that could be used to secure a loan?

Some items generally cannot be used as collateral, unless they are used to secure the purchase of that item itself. These include:

• Furniture for your home
• Clothing
• Kitchenware