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WHAT IS A COLLATERAL LOAN?
A collateral loan is also called a secured loan. It is a loan obtained from a banking or other financial institution, where in exchange, the creditor may sell that which is offered for collateral if the loan is unpaid. A collateral loan is often offered at a lower interest rate than an unsecured loan, because there is a guarantee of repayment should the borrower default on the loan.

A collateral loan may use different things to secure the loan. Often people use stocks or bonds to establish a collateral loan. They can use their ownership in property, where a portion of perhaps a home, or a piece of land, is set up as collateral. If the borrower defaults, he must sell the property to pay back the loan, and the lender has rights to sell the property also, even if only a portion of the full value belongs to them. In these cases, a lender would sell the home, and give the previous owner the monies not offered on collateral.

A collateral loan may also be based on expected collateral, like the expected return on a harvested crop, or on an investment. Occasionally, one can use property like high-valued jewelry as collateral, or other high-valued goods. This is rare, as most collateral loans are based on paper assets, or on real estate.

If the collateral given decreases in value and the borrower defaults, he or she will still be responsible to repay the amount at which the collateral was previously assessed. For example, a person borrows $100,000 on a home of the same value. If the home decreases in value, say to $75,000, the borrower must still pay back the full amount, as dictated by the terms of the collateral loan. If a borrower has defaulted on the collateral loan, his or her home will be sold. However, the borrower will still owe the lender $25,000. This may requirIn most cases, people will not borrow to the full value of a possession offered as collateral to avoid the circumstances described above. Instead, the collateral loan is usually only a portion of the full value of a possession, or of paper trading like stocks and bonds. People with a number of high value items, properties, or stocks and bonds can of course get larger collateral loans. However, with any loan, it is best to borrow only what one needs, since interest rates will still mean a higher payback than the actual money borrowed the borrower to sell more possessions or enter bankruptcy.

WHAT IS A COLLATERAL?
Collateral is something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although the latter may also be accepted as such. In case of default, the creditor may sell the collateral and apply the money thus acquired to payment of the debt, charging the debtor with any deficiency or crediting him with any surplus. The borrower may usually substitute other collateral for that held by the lender if it is acceptable to the latter. Such a privilege is particularly useful to borrowers who buy and sell securities. Merchandise collateral—such as negotiable warehouse receipts, bills of lading, and trust receipts—is also used, as is personal collateral, including deeds, mortgages, leases, and other rights in real estate. Other collateral may include bills of sale of movable goods, such as crops, machinery, furniture, and livestock, and savings-bank passbooks. Collateral may be defined as property that secures a loan or other debt, so that the property may be seized by the lender if the borrower fails to make proper payments on the loan.

When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made. For example, the useful life of the collateral will typically have to exceed, or at least meet, the term of the loan; otherwise the lender's secured interest would be jeopardized. Consequently, short-term assets such as receivables and inventory will not be acceptable as security for a long-term loan, but they are appropriate for short-term financing such as a line of credit.

In addition, many lenders will require that their claim to the collateral be a first secured interest, meaning that no prior or superior liens exist, or may be subsequently created, against the collateral. By being a priority lien holder, the lender ensures its share of any foreclosure proceeds before any other claimant is entitled to any money.

Properly recorded security interests in real estate or personal property are matters of public record. Because a creditor wants to have a priority claim against the collateral being offered to secure the loan, the creditor will search the public records to make sure that prior claims have not been filed against the collateral. If the collateral is real estate, the search of public records is often done by a title insurance company. The company prepares a "title report" that reveals any pre-existing recorded secured interests or other title defects. If the loan is secured by personal property, the creditor typically runs a "U.C.C. search" of the public records to reveal any pre-existing claims. The costs of a title search or a U.C.C. search is often passed on to the prospective borrower as part of the loan closing costs.

In startup businesses, a commonly used source of collateral is the equity value in real estate. The borrower may simply take out a new, or second, mortgage on his or her residence. In some states, the lender can protect a security interest in real estate by retaining title to the property until the mortgage is fully paid.

Loan-to-value ratio. To further limit their risks, lenders usually discount the value of the collateral so that they are not extending 100 percent of the collateral's highest market value. This relationship between the amount of money the bank lends to the value of the collateral is called the loan-to-value ratio. The type of collateral used to secure the loan will affect the bank's acceptable loan-to-value ratio. For example, unimproved real estate will yield a lower ratio than improved, occupied real estate. These ratios can vary between lenders and the ratio may also be influenced by lending criteria other than the value of the collateral; e.g., a healthy cash flow may allow for more leeway in the loan-to-value ratio. A representative listing of loan-to-value ratios for different collateral at a small community bank is:

Real estate: If the real estate is occupied, the lender might provide up to 75 percent of the appraised value. If the property is improved, but not occupied (e.g., a planned new residential subdivision with sewer and water, but no homes yet), up to 50 percent. For vacant and unimproved property, 30 percent.

Inventory: A lender may advance up to 60 percent to 80 percent of value for ready-to-go retail inventory. A manufacturer's inventory, consisting of component parts and other unfinished materials, might be only 30 percent. The key factor is the merchantability of the inventory — how quickly and for how much money could the inventory be sold.

Accounts receivable: You may get up to 75 percent on accounts that are less than 30 days old. Accounts receivable are typically "aged" by the borrower before a value is assigned to them. The older the account, the less value it has. Some lenders don't pay attention to the age of the accounts until they are outstanding for over 90 days, and then they may refuse to finance them. Other lenders apply a graduated scale to value the accounts so that, for instance, accounts that are from 31-60 days old may have a loan-to-value ratio of only 60 percent, and accounts from 61-90 days old are only 30 percent. Delinquencies in the accounts and the overall creditworthiness of the account debtors may also affect the loan-to-value ratio.

Equipment: If the equipment is new, the bank might agree to lend 75 percent of the purchase price; if the equipment is used, then a lesser percentage of the appraised liquidation value might be advanced. However, some lenders apply a reverse approach to discounting of equipment: they assume that new equipment is significantly devalued as soon as it goes out the seller's door (e.g., a new car is worth much less after it's driven off the lot). If the collateral's value is significantly depreciated, loaning 75 percent of the purchase price may be an overvaluation of the equipment. Instead, these lenders would use a higher percentage loan-to-value ratio for used goods because a recent appraisal value would give a relatively accurate assessment of the current market value of that property. For example, if a three-year-old vehicle is appraised at $15,000, that's probably very close to its immediate liquidation value.

Securities: Marketable stocks and bonds can be used as collateral to obtain up to 75 percent of their market value. Note that the loan proceeds cannot be used to purchase additional stock.

LOWERING YOUR INTEREST RATE WITH COLLATERAL - WHY COLLATERAL MATTERS
Collateral matters when it comes to debt consolidation loans. If you want to get the best low interest debt consolidation loans out there, you will need to have good collateral. Among the most common collateral are automobiles and real estate. You see this kind of property almost always has a high value and is easily recognizable as property that can be resold by lenders if you happen to default on your debt consolidation loan.

When considering which collateral property is best to use consider an object that has the highest value of all the things you own then aim to borrow just a little under that amount. The lower the amount you ask for in relation to the value of your collateral, the better your chances are of getting one of the best low interest debt consolidation loans out there. Note that no two lenders are the same. You will find that lenders will offer a variety of low interest debt consolidation loans. The best low interest debt consolidation loans often can be secured through your local bank or via a small finance company. This is because larger bank or lender chains tend to get a fair deal of business anyway and don't need to offer you such a low interest rate to get you in their door.