What is Collateral?
Collateral is an asset that a borrower will provide to a lender to secure a loan. If a borrower fails to keep up their repayments then the lender can take ownership of the asset and sell it to recoup their losses. They will then pay the borrower any extra profit generated.
What's the purpose of collateral?
Collateral essentially makes a loan cheaper as it becomes less riskier for the lender.
Which loans require collateral?
The loans that typically require collateral are car loans, mortgages,Home improvement loans and secured credit cards. In the case of a mortgage, the collateral is the actual home being purchased inclusive of the deposit which serves as the home buyers ownership stake in the property.
Loans or credit facilities that usually don't require collateral include:
Credit cards, student loans, personal loans etc.