Cash, Loans, Debts, and Promises

Cash, Loans, Debit, Promises: Lesson 5

Collateral

  • if you have no credit history but need a loan, you may be able to use collateral to help get a loan.
  • Collateral is something valuable that belongs only to you that a creditor can have in case you don’t pay a loan from the creditor.
    • You and the creditor both must agree to this.
  • Example: you own your car free and clear. You want a loan but don’t have much credit history yet, so you use the value of your car to secure the loan. It is now called “collateral” for the loan.
    • The creditor becomes a lienholder (like a co-owner) on your car.
  • Let’s say you make three loan payments and lose your job. You can’t make payments right now. The lienholder (the creditor) sends a tow truck and takes your car. The creditor sells your car at an auction to get their money.
    • If the creditor doesn’t get enough to pay your loan, they can then come after you for the unpaid balance.
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