by Joseph Malek

Created on: September 02, 2010

From a monetary point of view, collateral is any item of property that has a perceived value which is pledged as security and given if one defaults on the repayment of a loan. In other words, if a person adds to a loan agreement an item that is worth a hundred dollars as part of the terms of the loan for a hundred dollars, such a loan is known as a collateral loan. The item or items that are pledged as payment, in the event of a non-repayment in cash to the person who granted the loan, is the borrower's collateral.

Then again, one can simply hand over the item that becomes collateral and just allow that property to satisfy the terms of the collateral loan agreement. You can also believe that such a collateral item is most likely worth more than the amount which is being loaned to the person who requires such a loan.

Such is the case when a person offers as collateral a used vehicle, jewelry and/or some other item of value that a bank and/or a lending institution is willing to accept as the repayment of money loaned to that person. During a depressed economy collateral loans are common. The loan company and/or a bank might require the owner to give the item to the lending institution prior to giving the agreed loan amount to said owner. Additionally, fees for storage, interest and processing fees will most likely be added to the amount that must be paid back to that particular lending institution.

Another example of a collateral loan is when a person gets a short term loan from a pawn shop, usually for no more than two months, which is based on a portion of the value of the collateral item, such as jewelry. The owner of the property must either re-pay that loan amount, plus the assessed fee, or the pawn shop then, by signed agreement, takes ownership of that collateral and subsequently sells the item for whatever a buyer is willing to pay.

As luck would have it, some real bargains can be found within pawn shops. If you did not know, banks and loan companies also sell collateral items that their former owner chose to give up, rather than repay the loan amount which was due and payable to the lender.

A mortgage can also be considered to be a collateral loan in the sense that the lender retains the title of ownership until after the mortgage amount is paid in full. On the other hand, the mortgagee has the right to live within and/or use the property in question.

You should also know that people who give that item of value to the person who grants the loan assumes the risk that such property might not be returned after the loan amount is repaid. Therefore, it is wise to retain possession of that collateral property and let the lending institution attempt to take the item, should the loan fail to be repaid during the agreed loan period.

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