What Can Be Used to Secure Debt?

Lenders are often only willing to issue a loan if the borrower is willing to secure it. This means that the borrower must offer the lender collateral that the lender can seize if the borrower fails to pay back the loan under the terms agreed. There are different forms of collateral a lender is willing to accept, although objects of significant value, such as houses and cars, are most common.

Purchase Loans

Collateral is often used to secure a loan that is used to purchase a specified object. In these cases, the object being purchased will be used as collateral on the debt. When a person purchases a home, he will do so by taking out a mortgage on the loan. The lender who issues this home loan will commonly make the house act as collateral.

Liquidity

Almost any item can be used to secure a debt. However, most lenders will especially value assets that are "liquid," meaning readily convertible into cash. Some assets are significantly more liquid than others. Most securities, such as stocks and bonds, can be readily sold on the market and converted into cash. However, other assets, such as real estate and certain types of retirement accounts, such as 401(k)s, can be converted into cash only with much greater difficulty.

Alternative Forms of Collateral

According to the Denver Business Journal, a number of surprising objects have been used to secure debts. The common factor is that all of them have monetary value and have a value that the investor can expect to remain relatively consistent. These include watches, jewelry, tickets to sporting events, golf club memberships, opera tickets, antique furniture, vinyl record collections, insurance policies, medical instruments, wine collections and tires.

Money As Collateral

In some cases, money itself can be used to secure a debt. This may seem senseless -- if the borrower has money available, why is he borrowing money and paying interest? However, a borrower may be borrowing money simply to build his credit history. Many borrowers with little or no credit take out secured credit cards -- credit cards secured by money in a bank account -- to help them build their credit score.