The term collateral loan sounds like some complicated legal jargon but the concept is one most people will immediately recognize. Collateral is another term for a security so a collateral loan is backed by a security provided by the borrower to the lender. A mortgage is a type of collateral loan since the house bought becomes a security to the lender; another example is a piece of jewelry sold to a pawnbroker. Before taking such a loan consider the following:
1. Your Assets Get Undervalued
As a rule, lenders are going to undervalue the asset you provide to get a collateral loan. For example, if you own stocks and shares the lender could only recognize half their market value. This is not so much a case of being mean but the desire to insure they can recover the full value of the loan if the sellable value of your collateral declines. They also take into account the difficult of selling your asset, and this is a serious issue given the recent fall in house prices across the USA.