Lending is inherently risky — you're giving someone money (or maybe a car) on the promise that they'll pay you back. Securing a loan with collateral is one way of mitigating that risk. A collateral item is something that the lender can take and resell if the borrower fails to make payments. For example, most auto loans are secured by the car, and most mortgages are secured by real estate. If the borrower on those loans fails to make payments, the contract stipulates that the lender can repossess the collateral.
In this article, we explain a basic overview on the types of collateral and assigning collateral to a loan. LoanPro's collateral tracking is as efficient as possible.
How Collateral Works
In LMS, collateral items are saved to individual loans, and a single loan can have multiple collateral items. We should also note that each collateral item has a type, corresponding to the four types of loans in LMS: Auto, Consumer, Real Estate, and Other. Each type of collateral has different settings defaults (covered in the Collateral Fields section below). We anticipate most lenders will use the same type of loan and collateral (e.g., a car securing an auto loan) but you can mix-and-match different types as well. This is especially useful for loans secured by several different collateral items: A single business-to-business loan could be secured with equipment, company vehicles, and inventory.
Before adding collateral on an individual loan, you may want to edit the available fields in your company settings. You have the ability to customize and adjust these collateral fields, and these fields store and track information. After you have configured collateral fields, you can set a loan type default for each of the major collateral types using System Defaults. You can also establish Loan Type Specific Defaults based on each of the four main collateral types.
Once you've configured the settings to your liking, you can enter collateral information for an individual loan. Our article on Adding Collateral Information covers how to do this and the walks you through the step-by-step process in the LMS UI. Additionally, you can use the LoanPro import system to bring in an existing body of collateral data.
However, if you'd like to export collateral information instead, you can most effectively export your data from the system using the Custom Query.
These are the terms associated with collateral:
These terms are synonyms: a collateralized loan and a secured loan both refer to loans that involve collateral. (Note not to confuse 'secured' with 'securitized'; that refers to loans that have been bundled and sold to investors.)
This is the process of taking back a collateral item from a delinquent borrower.
These loans are secured with collateral that has a vehicle identification number (VIN). Cars are the most common, but this category also includes ATVs, RVs, boats, and other vehicles.
These loans deal with land and property, and are often collateralized by the real estate itself.
These are loans for consumer goods, (such as appliances, hot tubs, electronics, etc.). Although it's rare for lenders to repossess these items, they can still use the collateral fields to track information about the item that the loan financed.
These loans can be uncollateralized, or, for any collateral that doesn’t fit easily into one of the other categories (like personal loans for medical expenses).
These are essentially custom fields that are specifically for collateral on a loan.
Can I have multiple pieces of collateral on a single loan? Yes you can. You can have up to 50 items of collateral on a single loan.
Can I customize my collateral fields? Yes, you can customize your collateral fields by navigating to Settings > Loan > Labeling > Collateral Fields. Our article Using Collateral Fields explains how.
For more information, check out these articles: