Collateral

Debt Term

Some types of debt require a promise to turn over a specific asset owned by the borrower if the debt is not repaid; this asset is called collateral.

Sometimes the debt and the collateral asset are connected – a truck is collateral for a vehicle loan, a commercial building is collateral for a commercial mortgage. But sometimes personal collateral must be promised (“pledged”), such as a founder’s home in order to get a large business loan, so collateral and debt are not connected.

Since collateral makes it more likely the debt funder will get its money back, these are called secured loans or secured debt. Unsecured debt does not require the borrower to promise collateral. For example a credit card company does not require you to promise to turn over your house if you don’t pay your credit card bills.

Don Gooding

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