Buying a property with a home loan typically means using the property’s value to secure the loan; a practice called mortgaging your home. But it’s also possible to use the value of your property as collateral on another loan, provided you fulfil the eligibility criteria and have enough usable equity available.
What is collateral or security on a loan?
When a bank or similar financial institution lends you money, they’re taking a risk that you may not pay them back. The higher a lender feels this risk is, the more the lender may charge in interest and fees on the loan.
To help reduce the lender’s risk (and the cost of your own loan repayments too), you can offer the lender security or collateral for the loan. This is a valuable asset that the lender can legally repossess and sell if you default on your repayments, to help them recover their money.
Most home loans are secured by the value of the property being purchased. Many car loans are also secured by the value of the car you’re buying. For some credit products such as personal loans, it’s possible to use a separate asset as collateral in order to help reduce your interest charges.
