What Are Cash Collateral Loans?

Cash collateral loans are loans granted by financial institutions based on the use of negotiable assets as security or collateral for the loan amounts. The range of liquid assets that can be used with these types of loans will vary, ranging from cash that is deposited into an interest-bearing account and is kept in check until the loan is paid in full, to the acceptance of assets that can be converted into cash with relatively little effort. Cash collateral loans are sometimes used by homeowners as a means of financing improvements to the home, consolidating various types of debt, and similar purchases.

The typical application of the term "cash collateral" is often defined as any liquid assets that can easily be converted during the course of a bankruptcy or the settling of estates; the term is also applicable to any of the assets that lenders accept for a cash collateral loan. Essentially, investment securities as well as assets like cash, documents of title and similar financial instruments may be used as the security for cash collateral loans. The range of securities considered acceptable may vary somewhat from one lender to the next, meaning that a liquid asset that is fine with one lender may not be accepted by a different lender.

While different liquid assets may be used to secure cash collateral loans, one common strategy involves the deposit of cash into an interest-bearing account that is established with and held by the lender. For the duration of the loan, the balance in that account can never get below the current outstanding balance on the loan itself. The policies of some lenders preclude any withdrawals from the account, except under a very limited set of circumstances. Even then, there are normally some fees and penalties associated with withdrawing funds before the loan is paid in full.

One of the benefits of cash collateral loans is that the pledging of the cash collateral can often make it possible to secure the financing at a more competitive rate. While the credit rating of the loan applicant is still very important, securing the loan with the collateral does help to reduce the degree of risk that the lender takes on in order to approve the financing. This method can be ideal to settle other debts carrying a higher rate of interest, reorganize household finances so they are easier to manage, and even borrow the money need to improve the property and ultimately increase the market value of the home.