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What Is a Collateral Loan?

A collateral loan is a type of loan wherein the loan taken out is secured by a personal asset that you own. This type of loan is also called a secure loan. In a collateral loan, the lender (usually a banking institution or loan company) will award the loan in exchange for the assurance that if you are unable to pay the loan, they will have the right to take the collateral and sell it as payment for the loan.
Usually, a collateral loan is given a lower interest rate compared to an unsecured loan because the collateral serves as a guarantee that the loan will be paid within the payment period.

Usually, people will use stocks or bonds as collateral for this type of loan. Other assets that are usually offered include property – a house or a piece of land. There are also loans based on what is called an “expected collateral.” An example of this will be properties with an expected return like harvests or an ongoing investment. High-value personal property like jewelry is also used as collateral in many collateral loans. But this type of loan is rare because collateral that is often used for loans are paper assets or real estate.

In the event a borrower defaults on the payment of the loan, he has to sell off the property in order to pay back the loan. The lender also has the right to assume the role of selling the property. If a part of the property is not included in the agreement, the lender will return some of the monies that is not offered in the collateral loan agreement.

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