What Is Collateralized Debt?

A home typically is collateral for a mortgage loan

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.

References

• Investopedia.com: Collateral
• Wisegeek.com: What is a Collateral Loan?