A collateral loan, alternatively known as a secured loan, provides a borrowing option backed by an asset you possess. This type of loan requires you to pledge an asset as security against the borrowed funds. Among the most familiar examples of collateral loans are vehicle loans and mortgages. These loans are termed “secured” because they are supported by the collateral, reducing the risk for lenders.
In addition to auto loans and mortgages, there are other valuable assets that can be used as collateral. For instance, you can secure a loan with funds in a savings account or a certificate of deposit (CD). By offering these assets as collateral, you are essentially promising the lender that if you default on the loan, they can seize the collateral to recoup their losses. This added security for the lender often results in more favorable terms for the borrower, such as lower interest rates or higher borrowing limits.
It’s essential to carefully consider the assets you use as collateral for a loan, as defaulting on the loan could mean losing the asset. However, for many borrowers, collateral loans provide a practical way to access funds at more favorable terms than unsecured loans, especially if they have valuable assets to leverage.
(Response: Another name for a secured loan is a collateral loan.)