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Collateral Basics for Students

Collateral is an asset provided by a borrower to a lender as security for a loan. If the borrower fails to repay the loan, the lender can seize the collateral. Common types of collateral include property, stocks, bonds, cash, life insurance policies, vehicles, and appliances. The value of collateral is the amount the asset could be sold for in a fair market.

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48 views1 page

Collateral Basics for Students

Collateral is an asset provided by a borrower to a lender as security for a loan. If the borrower fails to repay the loan, the lender can seize the collateral. Common types of collateral include property, stocks, bonds, cash, life insurance policies, vehicles, and appliances. The value of collateral is the amount the asset could be sold for in a fair market.

Uploaded by

Jude Conway
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Principles of Business Grade 10 – Week 13- 28th March, 2023

Topic: Significance of collateral in accessing capital to establish a business

The Concept of Collateral

Collateral is an asset (such as property or something else of value) that a borrower provides as security
in order to get a loan from a lender.

If a borrower fails to pay back the loan, the lender can use the borrower’s collateral as payment instead.
The lender wants to feel secure that it will not lose out from making loan and in many instances will
therefore ask for some form of collateral before giving a loan.

Different types of collateral

Types of collateral Details

Property This is a common form of collateral. A business may pledge the deeds
to its buildings or land as security for a loan or mortgage (a long-term
loan to purchase property).
Stocks An entrepreneur may hold shares in companies which can be used as
collateral.
Bonds Government bonds are investments in the form of lending to the
government. There are also private sector bonds. An individual can use
some or all of their bonds as collateral to secure loans.
Money In order to secure a loan it is possible to use cash that you already have
as proof that you are financially viable, agreeing to forfeit a cash
amount should you fall behind on loan repayments.
Cash surrender on life Someone with a life insurance policy can assign that policy to someone
insurance else in return for a loan. The lender can then cash in the insurance
policy should the borrower fall behind on their repayments.
Motor vehicles A vehicle can be used as collateral to purchase that vehicle under a hire
purchase arrangement. The hirer does not become the owner of the
vehicle until the final payment is made. In other instances, an individual
who owns a vehicle outright can use that as collateral to secure a loan.
Appliances Machinery, equipment and electrical goods can be used as collateral.

The value of collateral

The value of collateral is the value that the asset used as collateral will be able to command in a fair
market. For example, if a piece of land is used as collateral then the value assigned to it is the
financial amount that the land is worth.

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