Collateral loan

A collateral loan, also called a secured loan, is a type of loan wherein the borrower pledges an asset, which can be sold or repossessed by the lender if the borrower is unable to pay the loan. The pledged asset is called collateral. The purpose of collateral loans is to reduce the risk to lenders since they can at least get something of value in case the loan defaults.

Collateral loans are advantageous not just for lenders, due to the risk reduction, but also to borrowers. The reason for this is that collateral loans typically have better loan terms (i.e. include significantly higher loan amounts and more affordable installment amounts) than unsecured debts due to the lower risks involved.

There are different kinds of collateral that can be given for a collateral loan. One of the most common kinds of collateral offered is real property. When a home or piece of land is given as collateral the collateral loan is specifically called a mortgage loan. Other kinds of collateral offered for collateral loans include jewelry, stocks, bonds, and cars. Just like in mortgage loans, it is common in car loans for the car that was bought to be offered as collateral.

Note that in collateral loans, the borrower has complete ownership of the collateral but only gives the lender the right to take ownership if loan terms are not fulfilled by the borrower. However, the borrower usually cannot resell that property until a certain percentage of the loan, if not the full amount, has been paid.

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