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. Read the rest of this entry »
