What Can Be Used as Collateral For a Loan?
- 19th November 2018
- Posted by: Loanable
- Category: Resources
By definition collateral is “Something pledged as security for repayment of a loan, to be forfeited in the event of a default.”
Collateral is something we think of when we want to take out a loan to purchase something, and the item we wish to buy secures the loan.
The first two things that come to mind are buying a car and buying property.
In some instances when you buy a car, depending on the type of financing you use, the car secures the loan. The same is true if you buy a property and require a mortgage, the mortgage is secured by the property.
Secured loans are different than unsecured loans, and as such are also underwritten or approved differently. Interest rates are usually lower, loan terms may be longer, and in some instances the item used as collateral may be seen as an investment; such as in buying property.
Secured loan also are less of a risk to lenders due to their being collateral on the loan.
Even those borrowers with low credit scores or bad credit can still be approved for some secure loans, in part due to the fact there is something of value securing the loan.
Having collateral on a loan reduces the lender’s risk, if the borrower defaults on the loan, the lender can repossess the item used for collateral. However, repossession is always a last resort, as the sale of the collateral may not always clear or pay off the loan.
Collateral can also be used in a different way when buying a property and the property being the collateral. In some instances someone may have something of value that they wish to pledge as collateral in order to take out a loan.
The borrower already owns the item to be pledged as collateral, and wants to borrow money against it, as opposed to buying a house, but needing the mortgage to complete the transaction and sale.
As to what can be used as collateral for a loan can come down to two main categories:
* The item itself and its value
* The lender, do they accept pledged items of value as collateral
Just as in the insurance industry, anything of value can be insured, in lending almost anything of value can be used as collateral.
However, as we may have heard of wild stories of a dancer insuring their legs, or a famous pianist insuring their hands, you need to find the right insurance company to grant the policy.
In lending it is the same, the majority of banks and lenders are only going to grant secured loans on conventional items of collateral, such as a car, motorcycle, property, land, etc.
As we will see, there are some different and unique items of value that can and have been used as collateral for a loan.
Unique Items Used as Collateral
In looking at some different and unique things that can be and have been used a collateral for a loan, we also can look at some more traditional items.
The first things that come to mind are of course property, or a car, even raw land. They have a value.
However, there also is good, silver, coins, such as in collectable coin sets, and rare currency. These also have value, and can be pledged as collateral for a loan.
If it has value, it can be borrowed against. This can include shares, stocks, and other investments.
When taking out a payday loan, or even any loan, you are pledging part of your pay cheque each month to repay the loan. Not quite collateral, but a pledge of a portion of your wages.
Some other unique items of value that can be used as collateral:
Intellectual Property: For some business and even individuals, intellectual property such as writings, music, and even patents a company may hold, have a value, and could be pledged for a loan.
As with all unique items of collateral, finding a lender who will grant a loan against odd and unusual items is the key here.
Antiques, Art, Wine and Whiskey: All of these things can have a value, some pieces of art, and antiques can be worth millions.
Wine and whiskey collections, and even some individual bottles can carry a high price tag. All of which could be used as collateral for a loan.
One thing to also remember when we think of these unique items for collateral, the lenders may be just as unique. In some instances these pledged items may be similar to going to a cash convertors or pawn broker. Although a very different one.
Lottery Tickets: Try to find a lender to lend against these, but if it is a winning ticket and it can be verified, then it has value. Naturally the first thing someone may ask is why borrow against it, just cash it in for the money.
Domain Names: Oddly enough certain domain names have a value, and while they could just be sold for the cash, they can also be pledged as collateral for a loan.
In many instances, certain pledged items for loans are to gather the money to continue to fund the business or organisation.
You may have a valuable domain name, and need the money to build the web site and get the company started.
Cattle: In some parts of the world there are banks, such as one in Zimbabwe, that accepts cattle as collateral for a loan. Cows have a value, it’s just finding the right bank to take the cash cow to.
Horses: While we’re discussing animals as security for a loan, horses are used regularly as collateral for loans. Some race horses are worth tens of millions.
You can let your mind go as to what other items could be used as collateral. Again, anything of value can be pledged for a loan, and again the crucial element of the whole loan and lending process is finding a lender that will accept your collateral.