Probably the most common form of collateral loan is the real estate loan. The property and/or residence being purchased with the mortgage is considered to be the collateral for the duration of the loan. In the case of real estate, the lending institution retains an interest in the property being purchased until the loan is paid off. In order for the property to change hands the mortgage holder must approve the transaction while there is an outstanding balance on the property. All claims the mortgage holder has on the property are released once the loan is paid in full.
Automobile loans work in much the same fashion. Like the property in a real estate loan, the vehicle itself is considered the collateral for an automobile loan. This allows the finance company to reclaim the vehicle should the owner default on the loan. In order to ensure the collateral, in this case the auto, is sufficient to cover any losses due to default, typically the amount loaned will not exceed the market value of the auto.
Any number of items may be used as collateral in order to obtain a cash loan. Assets such as jewelry, securities/bonds and other valuables may be held as collateral, as long as the lender considers them valuable enough to cover the loan. Any number of personally owned items may be accepted as collateral at the discretion of the lender.
Providing collateral for the lender to hold does not mean surrendering possession of that asset. However, based upon the initial agreement, the lender is entitled to retain control until the loan is paid in full. The sole purpose of collateral is to provide the lender with confidence that the loan will be repaid as promised. Upon final payment, any properties held by the lender will be released back to the borrower.
