Collateral is a term used mainly for loans.
Two of the most common types of collateral are your vehicle
and your home, though jewelry, paintings and other valuable
possessions may be used for collateral. If you owe a mortgage
on your home, you’ve likely promised that you’ll
forfeit the home in the event you are unable or unwilling
to repay the loan in full. The same is true of a car loan.
The two main types of loans are secured and unsecured.
An unsecured loan has no collateral attached. That means
that if you default on
an unsecured loan, the lender has no recourse other than to
take you to court. With a secured loan, the lender has the
right to repossess your property if you don’t make payments.
So should you agree to put up collateral in order to achieve
a loan? There are pros and cons to be considered.
Pro - You’re much more likely to achieve a loan with
good rates and terms if you put up collateral. The reason
is simple - the lender has something to repossess in order
to recover losses if you default on the loan.
Con - You are in a position to lose your property if you
can’t make payments. You may have every intention of
making those payments, but illness, accidents or even a layoff
at work could mean you can’t pay.
The decision to put up collateral is yours alone. Weigh your
options carefully.
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