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What is Collateral?

Usually borrowing funds often requires the designation of collateral on the part of the recipient of the loan. Assets that have been pledged by the recipient as security on the value of the loan is referred to as Collateral.

If there are such circumstances that make it impossible for the recipient to repay the loan, then in that case ownership of the collateral is transferred to the entity that issued the loan in order to settle the debt. Here I have given some information about the different types of assets that may be used as collateral in different situations.

realestate purchases

Real estate purchases

One of the most common examples of a collateral loan is with real estate purchases. In several cases, the property that is being purchased with the mortgage is held for the duration of the loan as collateral . Essentially, the financial institution that has given the loan retains interest in the property until the mortgage is paid in full by the homeowner.

As long as there is an outstanding balance on the loan, the mortgage holder must approve any changes in ownership of the property. The mortgage holder considers the business arrangement to be concluded and releases all claims to the property once the debt obligation is discharged.

Newly purchased vehicle as collateral

In like manner, a newly purchased vehicle can be used as collateral on the loan used to purchase the car. By this finance company is given a right to take possession of the vehicle This if the owner defaults on the loan for any reason. Generally, companies that finance car loans will only finance according to the current market value of the vehicle. This helps to make sure that the collateral held on the property is sufficient enough to recoup any losses that result from the default.

collateral

Other assets as collateral

On cash loans other assets can also be used as collateral. For instance, jewelry and securities that have a certified value, until the loan is repaid may be held as collateral. In some cases, rare antiques may also be accepted as collateral. It merely depends on the circumstances, just about any asset that is clearly owned by an individual can be used as collateral, as long as the entity that makes the loan is accepting the asset as being sufficient to guarantee the loan amount.

Usually providing collateral  does not mean surrendering possession of the asset that is used as collateral. Despite of that, the borrower is covenanting to retain control of the asset for as long as it takes to repay the loan. This helps to provide a surety to the lender that the investment made in the borrower will be recouped, either through the systematic repayment of the loan, or by taking possession of the collateral.

This post was written by:

– who has written 328 posts on Loan Mortgage Credit!.

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