QandAs: Loans

What is Collateral?

Answer:
When applying for a personal loan, banks, credit unions,

and other lenders normally require collateral, which is a piece of property that secures the loan.

There are many types of loans. Some loans are unsecured, wherein the borrower does not need collateral. To qualify for this type of loan, a person must have an excellent credit score and adequate income. Since the majority of applicants have fair or average credit, it can be hard to get approved for an unsecured loan. For this reason, many persons apply for a secured loan and pledge a piece of property.

Collateral loans generally have lower interest rates than unsecured loans. Because the borrower’s personal property secures the loan, lenders are more apt to approve a collateral loan. If the borrower defaults on the loan, the lender can demand the collateral and sell the property. The proceeds from the sale are used to repay the loan.

If the borrower defaults and their personal property depreciates, the lender is unable to sell the property for the full loan value. In this instance, the borrower would be obligated to pay the difference. This might involve selling additional belongings or establishing a payment arrangement with the lender.


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