What Happens to the Collateral When a Secured Loan Is Paid Off?
Lenders sometimes require you to put up collateral as security against a loan. The lender can seize the collateral and use it to repay the loan if you fail to make payments. When you are done repaying the loan, you get the collateral back because the lender no longer has any claim to it.
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What is Collateral?
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In general, collateral is any property that you give the lender the right to as part of the initial loan agreement. The collateral might be cash or a certificate of deposit for a secured loan from a bank or secured line of credit from a credit card company. It might be a large asset in the case of a vehicle loan or a mortgage. Or, it could be household goods for a smaller secured loan. The collateral is named in the agreement for the secured loan, and you are not allowed to sell the collateral while the loan agreement is still in effect.
Returned to Borrower
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If the lender was actually holding the physical item or money, these will be returned to you as soon as you pay off the secured loan. For instance, with a secured credit card, the lender holds some of your money in a special account as collateral. If you close the credit card account or convert it to an unsecured card, the lender writes you a check for the amount of your collateral deposit. If your secured loan was at a pawn shop, you can get your item back when you pay back the loan.
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Lien Release
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Large secured loans, such as mortgages and auto loans, allow you to continue using the item being held as collateral while you pay the loan. However, the lender has a lien on it, which is a notation on the title giving the lender the legal right to seize the collateral as payment for the loan if you default. After you repay the loan in full, the lender sends you a document stating that it has released the lien on your property.
Getting Your Title
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You usually must file the lien release document with the agency that manages the property's title to get the lien removed from the title. If you have an an auto lien release form, take that to your state's department of motor vehicles to have a clear title issued in your name. With a real estate lien release, file the lien release form with the county's office so the title will show up as being in your name only.
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