Collateral

Full definition

Collateral is property or another asset that a borrower offers to a lender as a guarantee of loan repayment. The lender takes a security interest in the collateral, which gives them the legal right to take possession of it if the borrower fails to repay the loan as agreed. Common types of collateral: Real estate (mortgages and HELOCs), vehicles (auto loans and title loans), savings accounts (secured personal loans), investment portfolios (margin loans), and business equipment (commercial loans). Unsecured vs. secured personal loans: Most personal loans available through online marketplaces are unsecured, meaning no collateral is pledged. This means the lender cannot take your car or home if you default (though they can pursue the debt through courts). In exchange for accepting this risk, unsecured lenders charge higher APRs than secured lenders. A secured personal loan, by contrast, requires collateral (often a savings account or CD) and typically offers lower APRs but puts the collateral at risk. Title loans use your car as collateral with extremely high APRs (often 300%+) and should generally be avoided in favor of unsecured personal loans from legitimate lenders. Why collateral matters: Pledging collateral reduces the lender's risk, which is why secured loans carry lower interest rates. For borrowers with weak credit who can't qualify for unsecured loans at reasonable rates, a secured loan using a savings account as collateral may be a viable option.

• Secured loan
• Unsecured loan
• HELOC (Home Equity Line of Credit)