Collateral and Secured Loans explained in under 2 minutes.
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Collateral is any borrower’s property that is temporarily given to the lender to make sure that the loan will be repaid on time. As soon as the loan is duly repaid, the lender simply returns the collateral back to the borrower. However, in case the borrower defaults and does not repay the loan on time, the lender takes ownership of the collateral. Loans that have collateral attached to them are called ‘secured loans’.
These loans normally have a lower interest rate, because the lender feels more secure and does not need to overcharge. On the contrary, what often happens with unsecured loans, is that faithful borrowers are being charged some extra cost, which lenders then use to cover the damage from non-performing clients.
Mortgages, being one of the most common types of loans, are secured loans as well. They have the actual real estate as their collateral.
The need for collateral is much lower, when there is a proven history of faithful credit performance. With credit bureaus lenders can check, if their borrowers are trustworthy and offer cheaper loans to their grade-A clients without any collateral. Instead, on emerging markets, where there are no established credit bureaus, banks often have to demand collaterals to secure themselves.
Turnkey Lender is a comprehensive system to manage your loan collaterals during the entire life cycle of a loan. Learn more at www.turnkey-lender.com.
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Minute Explainers by Lending Boost is a monthly animated series about the basic concepts of lending industry.
