Collateralized Loans
    
Lending terms have been thrown around very loosely and cause confusion for the borrower. Many personal finance matters aren’t adequately addressed in high school, and sometimes not addressed at all, this can lead to bad credit and driving someone to look for loan sharks online. How credit works or different types of loans are unfortunately learned through word of mouth or trial and error. It’s important to understand what these terms mean and how these things work to save yourself from very costly mistakes.
    This brings to mind a story about a 21-year-old male who had recently had a problem with the check he had written. He had never been exposed to concepts or ideas around personal finance or banking and had only used the bank to deposit his part-time job paychecks and withdraw spending money. He had to write a check to give to his mother for money he had owed her. He had never written a check before and it only ever had experience with his part-time job paychecks which he used to sign the backs of in order to cash them. Without looking at the check his mother deposited it into your bank account and received a call a few days later saying he couldn’t cash the check should receive from her son. Upon further inquiry she found out he had signed the back of the check and not on the appropriate line in front. This obviously rendered the check cashable until he signed in the appropriate area and subsequently resolved the matter. This is an extreme example to illustrate the point that it’s important to have a general idea of how things work in banking and personal finance.
    Collateralized loan is a lending product requires collateral to be secured. The word collateralized is more commonly seen in lending products in the business world however any loan that requires collateral is collateralized. Collateral is used to mitigate risk to the lender by giving them the opportunity to liquidate collateral on defaulted loans in order to recoup the outstanding balance. Understanding the different types of collateral will help when applying for a secured loan as not all collateral is created equal. The bank evaluates collateral based on its ability to hold its value over time and also the ability to liquidate it. Many types of investments would be the bank’s preferred collateral. Guaranteed investments such as CDs and GICs which are insured are considered some of the best collateral. However they also need to be accessible, so if there’s a large penalty associated with early redemption that will also be factored into the bank’s evaluation.
    Homes are another attractive type of collateral to a financial institution in most cases. As long as there aren’t depreciating property values were major issues with the house itself preventing its appraised value from being realized, banks are happy to accept them. Another relevant factor is if there is an existing lien on the house by another financial institution as this would cause any subsequent liens to take less priority if the home is liquidated due to a default. With a house or any type of collateral an evaluation or appraisal needs to happen to assess what the true value is. Many people become confused with the value of their home; there is a difference between a market value and the appraised value. Market value is usually determined by how much a home similar nature was recently sold for whereas the appraised value is done by a professional appraiser. Professional appraisers are people that are familiar with construction codes; lend evaluation and other factors that can cause a property value to rise or fall. Market value is determined by how much someone is willing to pay for a home. There are no required professional accreditation’s or required education to purchase a home, if you have the money or can get the financing and usually by the house.
    Having a little insight into what collateral is and how lending institutions look at it make it easier to work through the qualification process for getting a lending product.
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