Secured loan: what is it, how does it work and how to get one | Personal finance

What can be used as collateral on a secured loan?

Often times, the type of collateral required for a secured loan is related to the underlying purpose of that loan. This is particularly illustrated by mortgages, in which the home loan is secured by the financed house. That said, a suitable collateral can also depend on a number of other factors including the lender and the loan amount. Common forms of guarantee include:

  • Real estate, including homes, commercial buildings, land and real estate equity
  • Bank accounts, including chequing accounts, savings accounts, certificates of deposit (CDs), and money market accounts
  • Investments like stocks, mutual funds, and bonds
  • Insurance policies, such as life insurance
  • Vehicles ranging from cars, trucks and SUVs to motorcycles and boats
  • Other valuable assets like precious metals, coins and collectibles
  • Machinery, equipment, inventory and other business assets

What if you are unable to get a secured loan?

If you are in default on a secured loan, your lender can seize the collateral to collect the outstanding loan balance. In the case of a mortgage, it is about filing a foreclosure action against the borrower. If you default on an auto loan, the lender can repossess the financed vehicle. In general, the value of the underlying loan collateral must meet or exceed the loan amount, which improves the lender’s chances of limiting their losses in the event of default.

Robert P. Matthews