I don't understand collateral loans

[intent]

So...here's the description I was given:

1. You give the bank money to hold on to (say, $50k)
2. Bank lends you up to your amount (50k)
3. You pay interest on the amount you borrow (5-10% or more).

and the bank touts "you can collect interest on the amount you're not using!!!11!"

I don't understand. Are they giving you the privilege of using your own money, but with 5-10% interest on the parts you do use? Why would anyone pay them to use their own money?

 

[jefe]

Typically they're secured by some more-illiquid asset than cash? Not sure I get what you're saying. Why would someone deposit cash to borrow it with interest?

 

[level32]

As jefe said, your initial $50k is usually in the form of something that you can't easily turn into $50k or still have a need for it.

 

[cchen]

Also, you establish credit which may be important for an early stage business

 

[Blackhood]

Collateral means something of value. So you essentially give the bank your car or house, in exchange for $50k. If you don't pay the $50k back then the bank keeps your house or car.

 

[Nicola]

Or your broker might do the same thing using restricted stock you can't sell.

 

[aravenel]

Originally Posted by Blackhood

Collateral means something of value. So you essentially give the bank your car or house, in exchange for $50k. If you don't pay the $50k back then the bank keeps your house or car.

This. You don't give them cash, you give them your boat or car or house or something illiquid.

 

[acidboy]

Originally Posted by intent

So...here's the description I was given:

1. You give the bank money to hold on to (say, $50k)
2. Bank lends you up to your amount (50k)
3. You pay interest on the amount you borrow (5-10% or more).

and the bank touts "you can collect interest on the amount you're not using!!!11!"

I don't understand. Are they giving you the privilege of using your own money, but with 5-10% interest on the parts you do use? Why would anyone pay them to use their own money?

I'll try to explan:

- you need the money

- you have maybe a house or a property worth a good amount of money

- you don't want to sell that but you need the money

- bank offers to give you a loan, but they also need some sort of protection just in case you bail

- you give them the title and they give you the money

- you pay them back and you get your ownership rights back

 

[pebblegrain]

maybe you are confused with secured credit cards.

 

[JoelF]

Actually there are some business transactions (e.g. cash backed letters of credit) that work more or less as the OP stated. Basically the bank is agreeing to substitute its credit for yours, essentially a guarantee, and wants to hold cash collateral to secure that. But these are not consumer transactions.

 

[patrickBOOTH]

Originally Posted by JoelF

Actually there are some business transactions (e.g. cash backed letters of credit) that work more or less as the OP stated. Basically the bank is agreeing to substitute its credit for yours, essentially a guarantee, and wants to hold cash collateral to secure that. But these are not consumer transactions.

This is true, at the company that I work for we have LOC's that state the bank will back us. These LOC's cost money. A lot of money.

 

[Piobaire]

Anne Leibovitz can tell you all you want to know about collateral loans.