Collateral

Collateral is what makes a secured loan secured. The borrower pledges the asset as part of the loan agreement, the lender registers a security interest in the asset (a lien), and the asset can be claimed through legal process if the borrower defaults.

What can serve as collateral

• Real property: homes (for mortgages and home equity loans)
• Vehicles: cars, motorcycles, RVs, boats
• Financial assets: savings accounts, CDs, investment accounts, retirement accounts (for some retirement-secured loans)
• Personal property: jewelry, electronics, tools, instruments (typically pawn loans)
• Business assets: equipment, inventory, accounts receivable (for business loans)

The lender’s appetite for specific collateral depends on liquidity (how easy to sell) and value stability (does the value hold). Cars depreciate quickly; houses generally appreciate. This is why mortgages have lower rates than auto loans even though both are secured.

What happens if you default

The exact process depends on the collateral type and your state’s laws:

• Mortgages: foreclosure process, typically 4-12 months
• Auto loans: repossession, often within 90-180 days of default
• Pawn loans: the item is forfeited and resold by the pawnshop
• Share-secured loans: the credit union seizes the pledged deposits

In most cases, if the collateral sale doesn’t fully cover the debt, the lender can still pursue the deficiency through collection or litigation. The lien on the asset is a primary recovery method, not an exclusive one.