Types of Collateral Banks Will Consider

Any valuable can serve as collateral provided that the lender finds it acceptable. The type of collateral required depends on different factors, including the type and amount of the money, the tenor, structure, etc. Common types of guarantee required and accepted by most lenders include marketable securities, such as certificate of deposit, bonds and stocks, real estate, including buildings and land, and machinery and equipment. Other types of security are inventory, crops and livestock, as well as natural resources, such as gas and oil reserves.

Land and buildings or real estate are among the most common types of collateral required, especially when it comes to term loans. To this purpose, real estate comprises of factory buildings and warehouses, shopping centers, office buildings, and houses. Real estate is usually used as collateral for long-term and medium-term loans. Inventory can also serve as such for the purpose of asset-based financing. Natural resources, which are gas and oil reserve estimates at agreed price assumptions, are also used as collateral. Usually, they serve as collateral for project-tied and long-term loans, and the applicant is in control or the owner of these resources.

Plant equipment is another type of collateral, referring to machinery and equipment, drilling rigs, trucks, forklifts, presses, and other similar items. These can be used for syndications, revolvers, working capital loans, and so on. It is recommended to have a professional valuation made of the machinery and equipment in use as to help the lender establish the amount of the loan to be extended.

Marketable securities are yet another type, such as certificates of deposit and other securities that can be converted into cash. They are usually used as security for short-term loans.

As noted, the type of collateral depends on the loan’s purpose. For example, if you seek to take out a car loan, you can use the vehicle to be financed as collateral. The lending institution holds on to the car title until the vehicle changes ownership, meaning that the money has been paid back in full. In case the borrower defaults on the car loan within this timeframe, the bank can seize the asset. In some cases, the lender may require additional collateral. This is the case when the borrower offers no down payment or has poor credit. Another vehicle is an obvious source when it comes to finding additional security. If the applicant partly or fully owns the second vehicle, the equity can serve as collateral. It should be noted that the lending institution may present insurance requirements when a vehicle is used to guarantee a loan.

An easy option is to use a savings account, especially if you are applying for a loan with a bank. Rather than closing the savings account, the funds can be kept there as to earn interest. Then, this interest is to be deducted from the auto loan’s interest rate, reflecting the real expenses. While you are repaying the money, you will not be allowed to withdraw funds from the account, as they serve as guarantee. On the other hand, you can deposit funds in the account and withdraw from it, but only funds not included in the amount that serves as collateral. Finally, home equity is good when applying for a car loan. You do not need to fully own the property, which will serve as guarantee. A 20 percent ownership is sufficient to use it as collateral.

If you are applying for a business loan, the financial institution may require a different type of security. Some items that may not be accepted as collateral include jewelry, cars, perishable inventory, and others. Other lenders accept motorcycles, watercraft, and equipment with a title of ownership. In general, applicants for a business loan can use two types of collateral – assets they have a credit against and assets they already own. These include real estate, accounts receivable, business inventory, deposits and cash savings.