How Can One Secure a Loan?

When a person takes out a loan from a lender, the lender expects to be paid back. Few lenders make loans without some assurance that they will receive back what they lent -- plus a small profit. To make a loan more secure, a lender often demands that the borrower put up some form of collateral that the lender can seize in the event that the borrower defaults on the loan.

Secured Loans

A loan that is backed by collateral is known as a "secured" loan. The exact kind of collateral that a lender will require will depend on the type of loan and his policies. Some lenders, such as many credit card companies, will not allow an individual to secure the loan with any type of collateral. However, other lenders allow a loan to secured with various forms of collateral, often in exchange for dropping the interest rate.

Real Estate

Certain loans are often secured with real estate. For example, in a mortgage loan, the loan is secured through the house or other piece of property that the loan is being used to buy. If the person fails to make payments on the house, then the house may be seized by the lender. Real estate can secure other kind of loans, such as home equity lines of credit.

Financial Assets

Other types of loans may be secured by a fungible financial asset. When taking out a personal or business loan, the lender may ask the borrower to provide a list of his financial accounts and other assets that are easy to sell. The borrower may then propose to secure the loan with one or more of these assets. Common assets used as security include financial securities, cars, jewelry and pieces of art.

Cash

In rare cases, cash may itself be used to secure a loan. Typically, cash is not used, as it defeats the purpose of the loan -- why would a person borrow money when he already has it on hand? However, the person may wish to borrow money simply to improve his credit rating. For example, many people with poor credit take out secured credit cards -- credit cards secured by cash -- to show they can borrow money and pay it back on time.