What helps a bank in securing a loan is a collateral. Once an individual borrows money, he just agreed that the bank or the lender can get something valuable from him like a car, a house, a savings account, a certificate of deposit and the likes and the lender may also sell the collateral in order to cover his debt. A collateral also allows anyone to get a huge amount of loan and this also creates fast approval for those who need instant cash. This simply means that you are borrowing against your assets.
Many banks required a collateral especially if your loan is a secured one in order to guarantee that the borrower will never default the loan or the bank will not lose an amount of money. The moment you pledge borrowing against your assets, the lender or the bank has the full right to take action or possessed your treasured things if you happen to stop paying back the loan.
However, if your loan is an unsecured one, the lender cannot have something as a collateral. So, once you stop making payments, the lender can do nothing but sue you or make some legal actions against you.
All lenders want their money back after letting the people borrow it from them since they are making a business and their goal is to earn profitability not to lose money. This is the primary reason why most lenders want something as a collateral because the time and effort suing someone who do not continue making payments is somewhat frustrating and time-consuming. A collateral now serves as a protection for all lenders against dishonest clients.
What are the types of collateral?
A collateral can be in the form of real estate, investments, future payments from customers, machineries, equipment, insurance policies, savings accounts, automobiles, cash accounts and the certificate of deposit. These are the common assets that are allowed by the law to become a form of collateral over loans and debts. These things are very valuable and they come with a huge amount of money which may be enough in paying back the loan of an individual. Even business owners who take secured personal loan pledge their personal home as a form of collateral. As for the retirement accounts, they are not usually allowed to become a collateral.
Prevent the bank from taking your valuable assets by paying always on time.