Collateral can be any asset that is used by borrowers to provide lenders with the assurance that they will get their money back. Collateral serves as a security “deposit” in the event that a borrower is unable to pay back the loan amount in full at the end of the loan repayment period. What happens is that, if the borrower cannot pay the loan back, the lender claims ownership of the asset. Collateral is required for secured loans.
Perhaps the most commonly used asset as collateral is a house or real estate. When someone purchases a piece of land and/or a house, he usually takes out a loan to pay for it. The property being purchased is then used as collateral, which will be the guarantee of the lender for as long as the loan has not been paid off. At the end of the loan term, the deed of the property will be turned over to the borrower. Otherwise, if the loan is not fulfilled, the property will be taken over by the lender.
People who own the deed to their homes can take out new loans using their home as collateral. Usually, the loan amount will also be based on the value of the home.
Cars and other vehicles may also be used as collateral. In some cases, the setup is similar to the purchase of a new piece of real estate as described above. In other cases, they can be used as collateral for secured loans meant to make other purchases.