If you get behind on your loan payments, you may begin to worry that a lender can simply take anything as collateral. While there are indeed many things that qualify as collateral there are also strict rules as to what a creditor can and cannot repossess. Typically, a lender will prefer assets that are easy to turn into cash or “liquid” assets as they are called. Being the lender, they will also have greater power to see the default process go their way. It is then important as a borrower to know what can and cannot be eligible for collateral before entering into a loan contract.
Defining collateral – Assets are collateral and collateral are assets. Assets are anything that has exchange values that is owned by a business institution or individual. Less traditional lenders like private personal loan institutions are not as constrained in their ability to apply this definition when repossessing than banks that are chartered by the federal and state government.
Future Earnings – One example of a less traditional form of collateral that a private institution may be entitled to is a future earnings stream. This is defined as anything that has the capacity to generate revenue in the future including contracts or purchase orders. For example, if you the borrower are given a purchase order by a customer then this can be considered a future revenue. A collection of said purchase orders can then be documented and used as collateral to secure a loan by way of guaranteed payment made by the client.
Your Loans – Another form of collateral can be any loans you might already have issued to people in the past. This can come in the form of a promissory note or accounts receivable agreement. Like future earnings, these agreements are considered a future revenue for you. It is then possible to pledge them when applying for a new loan for yourself.
Home, Car, and Rent to own – Cars and homes are two assets that are commonly already purchased with some form of a loan be it a mortgage or car loan. If you default on a loan, then you can expect something like a “foreclosure” where the lender evicts you from the property to sell the home to recover their losses. Similarly, a car can be repossessed by a lender, leaving you responsible to pay whatever balance may be left over after the sale. Rent-to-own items include items such as televisions or furniture that you may have rented.
What cannot be Repossessed?
The following are all items that creditors are incapable of repossessing. However, it is worth noting that a creditor is still able to sue in court upon your default and eventually make their way to these assets by way of forced liquidation of all the borrower’s assets.
Name it to claim it – If a creditor and borrower fail to name a specific asset as collateral then it is illegal to repossess. For example, any unsecured loan that does not explicitly state that cars are collateral prevents a creditor from collecting that car upon your default, and you can then simply continue to make payments despite incurring late fees.
Assets bought with credit cards – Those who love their plastic can take comfort in that credit card debt is always unsecured. This means that credit card purchases cannot be named collateral and are therefore free from repossession.
Unenforceable contract – Any details of a collateral contract can be made void in the case that the contract does not comply with the legal requirements of your municipality be it state or federal. It can be worth it to hire a lawyer to go over your contract to vet whether it is valid or not. A lawyer can also advise you further on your rights as a consumer.