Mortgage Dictionary -> Collateral
When it comes to money and loaning, it's never free. Lenders who loan out their money expect to get something out of the deal (interest) and want to be protected should the borrower fail to meet the terms of the loan. This protection comes in the form of collateral, and it's something that any borrower, regardless of if they're going after an auto loan or a mortgage, should know all about.
What is Collateral?
Let's say you purchase a home using a mortgage through a bank. When the loan contract is signed, the bank places a lien on the home-essentially just a stake in it until the home is fully paid for-which can be redeemed should you fail to make the payments according to what you've both agreed on. In this case, the home is the collateral. In the case of a car loan, the car is also the collateral and can be taken back if you miss any payments.
When Does Collateral Become Mine?
So you might be thinking that when you use something as collateral, it's permanently collateral and never truly yours. That's actually not true, as something used as collateral is yours again, but only after you've paid for the loan. Depending on the type of loan you take out and the terms of it, your property can be used as collateral for as many as 30 years.
When Does Collateral Become the Property of the Lender?
The lender can only take collateral if the borrower has violated the loan in some way. This could be by making a payment late, failing to make a payment or making less than that which is required. Many lenders do not take collateral after the first missed payment, but some do, especially if the borrower does not communicate with them.
How Can I Keep My Collateral?
Keeping your collateral is rather simply. You only need to make at least the required payment, make it on time and, if you need an extension, ask the lender rather than assuming they'll be OK with it.