– Hi, I'm Ranie, Finance Strategist. In this lesson, we're going to cover: (calm electronic music) Collateral is any asset
offered by a borrower as security for a loan. In the event that the
borrower is unable to pay back the loan, the lender
may seize the collateral in attempt to recoup some,
or all of the loan amount. A lender's claim to
collateral is called a lien.
Although it is typical for the
asset being borrowed against to be put up as collateral, a variety of assets may
be offered as collateral including real estate,
vehicles, and even heirlooms with monetary value. If a loan is secured by collateral, it is usually offered at
a lower interest rate. The purpose of collateralized loans, therefore, is to make secured loans less risky to lenders and
more affordable to borrowers. However, defaulting on
a collateralized loan is more costly than
defaulting on a normal loan because the assets securing the loan will be re-possessed by the creditor. When considering a collateralized loan, borrowers should only work with trusted financial institutions. Some common examples
of collateralized loans are home mortgages or car loans, in which the house, or
car, is used as collateral. Many institutions also accept bank savings deposits,
investment accounts, and even future paychecks as collateral. Borrowers should be careful before taking on a collateralized loan as Predatory Lending has caused borrowers to unnecessarily lose assets, which is especially
common with payday loans. We want to hear from you. Are collateralized loans worth
the reduced interest rates? What is an instance when it may not be? Leave us your thoughts
in the comments below.
For more information, visit
www.financestrategists.com. (calm electronic music) Finance strategists, strategies– (trips over words) (all laugh).