Money Minutes: Collateral
We know time is precious, and that you don’t want to waste too much of it attempting to wrap your head around financial know-how. Educating yourself about money, though, is crucial to cutting the stress and potential mess in dealing with your money matters. Our Money Minutes posts help you make sense of personal finance and money-related definitions, concepts, and advice that can be tricky and confusing to break down. We’ll help you make better sense of it in just a few short minutes! Today’s topic is:
"Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien." -Investopedia
What That Means for You
Basically, if you borrow a large amount of money from a financial institution - to pay, for example, a mortgage or a car - you might have to put another valuable piece of property you own, like your house or vehicle, on the line for the lender to secure the deal.
If you make your payments on time and stay on top of managing the money you borrowed, then your collateral (your home, your car, whatever it is you and the lender decide on) is safe. If you fail to make payments or hit a rough patch with your finances and can no longer afford to pay your home or auto loan, though, the lender holds the power to seize the collateral from you to make up for the missing payments and lost money on their end.
Types of collateral that a lender will accept depend on the type of loan you're taking out, the type of institution you're borrowing from, and the market value of the collateral at the time. Common property that lenders will consider as collateral include:
- Real Estate (Acreage, property, natural resources)
- Savings Accounts
- Collector Items + Valuables (expensive musical equipment, furniture, antiques)