Collateral Loans: What Are They?

Examples Of Collateral Loans

There are different types of collateral loans that use a variety of assets. Learn more about these types of loans by reading through some of the collateral loan options below.

Residential Collateral Mortgage

A mortgage is slightly different from a standard collateral loan. In this case, real estate is used as collateral for the loan, even though the borrower doesn’t own it yet. 

With a mortgage, you can undergo foreclosure. If your lender has made good faith attempts to contact you, attorneys can file first legal, which initiates a complaint or mortgage default, depending on your state.

If you still do not seek options to avoid losing your home to foreclosure, your lender can either (depending on your state laws) file a lawsuit through the judicial system (in a judicial foreclosure) or auction off the home without involving a court (in a nonjudicial foreclosure). You’ll then get evicted from the home.

Second Mortgages

A second mortgage is similar to a primary mortgage on a home, only it’s an additional mortgage on a home. Just like your first mortgage, you use your home as collateral for the second mortgage as well.

However, you tap into your home equity to access a second mortgage. Equity refers to the difference between the value of your home and what you owe on it. Depending on your qualifications, you may be able to access a large amount of your home equity.

For example, home equity loans are a type of second mortgage where your lender gives you a lump sum. Home equity loans are more risky for the lender, however, because the first mortgage gets paid in the case of default and the second mortgage gets paid next. Still, home equity loans are secured, which can mean you’ll get a lower interest rate.

Auto Loans

Auto loans use the vehicle being purchased as collateral. If you don’t make your payments for your auto loan, the lender can repossess the vehicle to pay for some or all of the debt you owe.  

Loan Against Securities

You can also get a loan by pledging shares of items like stocks and bonds as collateral. This loan against securities may also be called portfolio-based lending. In this case, you can use certain personal assets as collateral for a loan, such as:

  • Stocks
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Bonds
  • Insurance policies
  • Certificates of deposit (CDs)
  • Personal savings accounts
  • Retirement accounts

You may use securities as collateral for many things, such as for buying real estate, investing in a business or buying a vehicle. With a loan against securities, the value of the asset used for collateral will affect the loan amount. Furthermore, if the securities you’ve put up as collateral go down in value, your lender may ask you to come up with the cash to bring your balance back up.

Business Loans

Business loans use assets such as machinery, equipment, inventory or buildings for the loan’s collateral. Securities collateral may also be used, such as stocks, bonds, mutual funds, etc. The lender may also use future earnings of the business as collateral as well.

It’s also possible to get an unsecured business loan, but these typically come with higher interest rates and more difficult borrower requirements.

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