As mentioned above, collateral depends on the nature of the loan. Some collateral loans include:
Residential Mortgages: Mortgages are loans where the house is the collateral. If a mortgage isn’t paid for at least 120 days, legal proceedings can begin by the loan servicer. Once the proceedings are complete, they take possession of the house through foreclosure. The property is transferred to the lender and they sell it to repay the loan’s remaining principal.
Home Equity Loans: A house can be used as collateral for a second mortgage or home equity line of credit (HELOC). This means that the loan amount will not be worth more than the house’s current equity. For example, if your home is worth $200,000 but you have $150,000 left on the primary mortgage, you can only get a second mortgage or HELOC worth $50,000.
Margin Trading: A big factor in margin trading is collateralized loans. For this, an investor borrows a broker’s money to buy shares. They then use the balance in the investor’s brokerage account as collateral. The loan increases the number of shares that the investor can buy, meaning that the potential gains are multiplied if the shares increase in value. However, the risk is also multiplied. If the shares lose value, then the broker will demand payment for the difference. If this happens, the account is used for collateral since the borrower wasn’t able to cover the loss.