By Colin McDougall |
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With many personal loans, the only security required for the loan is
your signature as a representation of your willingness to repay.
However, in some circumstances lenders may require that security
take the form of real estate, or investments such as stocks and
bonds. When these types of assets are offered as security, they are
referred to as collateral.
By offering collateral, you may be
able to borrow more than you could simply on your signature. As
well, it is also very likely that you will be able to borrow at a
lower interest rate. The reason for this is that if you default, the
lender can take possession of the collateral as payment toward the
balance of the loan.
In order to benefit from the secured
rate, loans must often be 100 percent secured. Real estate equity
and investments such as Savings Bonds, GICs or debentures, and
mutual funds are often used as collateral. For collateral other than
real estate, often referred to as "paper securities," only a
percentage of the asset's value may be accepted as security. This is
referred to as the "margin requirement." The amount you qualify to
borrow will be based on the fair market value of the security
what it's worth when you're using it as collateral, not what you
paid for it.
Margin requirements vary with the type of
security being pledged and from one financial institution to
another. For example, typically only 50 percent of the market value
of stock is accepted as security for a loan. The reason is that the
price of stocks can be volatile, increasing or decreasing very
quickly. Since, typically, only 50 percent of their market value
will be accepted as collateral, even significant decreases in value
will not result in insufficient collateral to cover the loan.
Assets pledged as collateral are reviewed periodically, and if the
value of the assets has decreased and there is not enough collateral
to cover the loan, you will be asked to pledge additional assets to
secure the loan.
In legal terms, most movable property such
as cars, boats and trailers are referred to as chattels. When you
use this type of property to secure a loan, you are often required
to sign a promissory note and a chattel mortgage giving the lender
the right to take possession of the property if you default on the
loan. Most car loans are actually chattel mortgages with the car
being used as security for the loan.
A chattel mortgage
contains a number of conditions that you must meet. For example, you
cannot use the same property as security for any other loan or PLC,
the property cannot be sold without the permission of the lender,
nor can the property be removed from the jurisdiction outlined by
the lender. |
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