All forms of debt can be collateralized (secured) or uncollateralized (unsecured). Collateral refers to the assets used to guarantee the repayment of a loan. Loan collateral can take many different forms.
Application
You may be asked to provide collateral when applying for a loan. The outstanding debt is then collateralized. If the loan is not repaid, the lender has the right to seize the assets used as collateral.
Types
When you purchase a home, the collateral for the mortgage loan is your house. The house protects the lender's interest.
Other Features
Collateral also can be valuables or other property that is pledged against a cash loan. This is the business of pawnshops, which make small loans and sell property that has been forfeited when the loans are not repaid.
Cross-Collateralization
A bank making more than one loan to a borrower may consider any collateral pledged for one loan to secure the other loans. This is known as cross-collateralization.
Foreclosure
In the case of a home loan, a bank seeking to seize property for an unpaid loan must initiate a legal proceeding known as a foreclosure.
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