What You Can Use as Collateral for a Loan
In making a lending decision to approve or deny an application, lenders often consider what are commonly known as the "Four C's": capacity, credit, capital and collateral. Collateral especially can be used to make up deficits in the other three "Cs" in the application of a debtor. Collateral can take a number of forms, both material and non-material.
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Definition of Collateral
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Collateral can be defined as the security interest which is assured to a lender in the case of a default on the part of a debtor. Default occurs when the debtor fails to repay a financial obligation, whether through involuntary circumstances or by willfully refusing to pay. With collateral, the lender is assured of receiving the value of her loan, either by payments from the debtor, or by seizing the collateral.
Secured Loans
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Secured loans are loans in which the item being financed serves as its own collateral. The most common types of secured loans are mortgages for homes and automobile loans. Sometimes commercial lenders also arrange secured loans for high-ticket items such as electronics or furniture. This is especially true when the items have been sold to customers whose credit is weak.
Material Goods
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Other types of loans backed with collateral use material goods as a guarantee against default. Any material goods of value may be used for collateral. Jewelry, electronics, and musical instruments are commonly used as material collateral. The important factor to remember is that the collateral is not valued at its purchase price, but rather by its present value, which is often much less.
Receivables
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Another type of collateral frequently used for commercial or business loans are receivables. Receivables are counted as income or assets for a business--invoices or other payments which are owed to or expected by the business, but have not yet been received. Invoices for goods which have been sold or services which have been performed are common forms of receivables. In fact, other loans which the debtor has made which are outstanding are considered receivables which can be used as collateral by the debtor.
Future Earning Potential
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The most common type of loan made by using future earning potential as collateral is the educational loan. This is especially true for educational loans made to finance studies such as medicine or other advanced degrees. The lenders, which often include states and the federal government, make the loan on the premise that the debtor will have increased earning power as a result of completing the program for which the loan is made. In the event of default, heavy financial consequences can result, with criminal prosecution also possible in the event of suspected fraud.
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Comments
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jfontana5112
Jan 05, 2010
You can find pawn shops online also. They seem to pay out more since I guess they have lower over head. There is Smart Term Loans and online pawn to name a few.
