Loan Blogger

Understanding Collateral

Secured loans require some type of collateral.  Collateral is what is used to secure the loan.  In other words it is something you put up that the lender can seize if you fail to meet your loan commitment.

A down payment is not collateral.  A down payment is actually not part of the loan at all, but rather a payment up front on the total purchase price of what you are buying with the loan.  Sometimes people confuse a down payment with collateral.  Even if you put up a down payment you may still need collateral.

In most cases the collateral must be something of significant value.  Usually close to the value of the loan and it is most often the item being purchased with the loan.  In the case of an auto loan the vehicle being purchased is the collateral.  With a home loan the home is the collateral.