When you’re asking to borrow a large amount of money, the lender isn’t going to just give you the loan. Lenders want large loans – for homes or cars, for example – to be secured by some kind of collateral. This is property that will be given to the lender should you, the borrower, default on the loan.
When you buy a home, your collateral is the house. If you fail to pay your loan, the lender will take possession of the property and, in most cases, sell it. This collateral creates a lien on your property, and this lien remains in place until the loan is repaid.
Home and auto loans are unique because most types of debt are unsecured. You don’t need collateral for other types of debt you may have, such as student loans, credit cards, utility bills, or medical bills. Home and car loans are almost always secured.
