What Is Collateral?

By Kristi Waterworth – Updated Feb 26, 2025 at 3:18 PM

Key Points

Secured loans offer lower interest rates and longer repayment terms by using valuable assets as collateral.
Common collateral types include real estate for mortgages and automobiles for car loans.
Collateral reduces lending risk, enabling loans for larger amounts or to borrowers with lower credit scores.

When it comes time to borrow money for a big purchase, you'll have a lot of choices to make. One of those may be whether or not to use a collateralized loan. Choosing to put up collateral for your borrowing can make a huge difference in how difficult it is to secure financing.

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Loan agreement with pen and calculator. — Image source: Getty Images.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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Types of collateral

As mentioned above, there are lots of different kinds of collateral since literally anything that has value can theoretically be used for collateral. However, there are some purchases that rely on collateral far more frequently than others. These include:

Cash. If you want to get a credit line and your credit is not great, or you've simply never had credit before, cash is often used as collateral for a secured credit line. This allows you to basically borrow your own money and have that payment activity reported to credit bureaus so you can establish positive credit.

Real estate. Real estate loans, commonly called mortgages, are one of the most common collateralized loans since pretty much everyone needs a mortgage to buy a home. Because mortgages are so long and expensive, it makes sense to put the house up as the collateral for the loan -- which is why your home must appraise for the purchase price if you're getting a mortgage.

Automobiles. Like homes, automobile loans are an incredibly common form of collateralized loans. Instead of putting your house up as the collateral, you use your newly acquired car. This is also why there are so many restrictions on automobile loans for used cars -- your bank has to make sure the asset is going to continue to be worth enough to repay the loan if they have to repossess it.

Certificates of deposit. Using a certificate of deposit (CD) as collateral isn't an uncommon practice. This can help you get a personal loan without losing the benefit of interest from your investment.

Business assets. If you're borrowing money for your business, it makes sense to use assets of the business as collateral. This might include things like inventory, equipment, or, in some cases, even accounts receivable.

Why loans require collateral

Many different types of loans require collateral, especially if the loan itself is risky. Although it might seem like a loan like a mortgage is a pretty low-risk gamble since everybody needs somewhere to live, the length of the loan and the sheer amount of money you're borrowing make it too much of a risk for a bank to take on without some kind of guarantee that the lender will be made whole in case of a default.

What Is Collateral?

Key Points

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About the Author

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