We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are the Different Types of Collateral?

By M.J. Casey
Updated: May 17, 2024
Views: 9,971
Share

Applicants for credit are often required to provide collateral for the loan; a property in which the applicant has an interest may be assigned to the creditor should the borrower fail to make payments. The collateral may be greater, less than, or equal in value to the proposed loan amount, depending on the creditworthiness of the borrower and the liquidity of the property. Anything of value may be used as collateral as long as both parties to the loan or note can agree on its value. Tangible and intangible properties may be considered.

Tangible properties are those that can be sensed, counted, and valued easily. Common types of tangible properties used as collateral are real estate, fixtures, inventory, and equipment for businesses. For individuals, tangible property includes real estate, jewelry and art, and cash equivalents such as stocks, annuities, and life insurance cash value.

Intangible products may or may not be easy to establish value for. Payment rights in accounts, chattel paper, financial instruments, and legal judgments may be complicated by changes in the marketplace, legal decisions, or an inability to liquidate the supposed asset. Payment rights are the rights to future payments for any reason, such as lottery winnings, residual earnings, or rights to payments of past invoices when collected by new owners of a business. Chattel paper represents the documents that convey an interest in goods, either owned or leased. Financial instruments often refer to investment funding of some type, such as money markets, insurance trusts, or bundled assets.

Legal judgments are funds awarded by a court of law. Anticipation of claims made for personal injury, medical malpractice, or violations of law are seldom acceptable forms of collateral. Collecting on these claims is often very difficult for corporations and individuals alike.

Other intangible products are those that may have substantial value in the future but are currently of little worth. Loans that offer this type of collateral often take the form of partial ownership of a new enterprise rather than a note. Examples are software development, patents and inventions, and new business or marketing concepts. These properties are associated with high risk- high return ventures.

Potential borrowers, when considering what collateral to offer to satisfy a loan requirement, need to keep in mind that creditors do not usually want the property. Instead, they want to be repaid. Thus, the emphasis of the application should be on the ability to generate sufficient cash flow to meet the loan obligation without needing to proceed to the costly and difficult steps to acquire and liquidate the collateral.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-are-the-different-types-of-collateral.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.