The more assets you possess, the more lending solutions you may have at your disposal. For a bank lending you money, the lender seeks an asset to pledge as security. In case the borrower fails in repaying a loan, the borrower's pledged assets will be forfeited in the event of a default.
Such assets are called collateral. Pledging collateral makes it a little easier to get large loans. A collateral improves the borrower's chances of getting approved for a loan. In return, securing collateral means the lender takes less risk. The lender usually liquidates the collateral asset to raise funds that the borrower failed to pay.
There are many types of assets that a lender can accept as collateral. If it meets local laws, lenders will prefer any asset that is easy to value and turn into cash.
Some of the ways to borrow against your assets are:
1) Real Estate (including equity in your home) - A benefit of homeownership or possessing real estate is the ability to build equity over time. A home equity line of credit (HELOC) enables the individual to borrow against the equity in his or her home. The borrower can draw from and repay an available line of credit, usually at variable interest rates. HELOCs typically have a fixed draw period (often 5 to 10 years), beyond which the line of credit is closed. After which, any remaining balance must be paid back, with interest.
2) Financial Investments - Similar to the aforementioned HELOC, a securities-based line of credit offered through a financial institution allows you to borrow against the value of your investment portfolio. Borrower's investments are pledged as collateral and held in a separate brokerage account, usually at variable interest rates. As with trading stocks, a securities-based line of credit is subject to a high degree of risk. Should the market value of the pledged collateral decrease, the bank may demand immediate repayment of outstanding dues or require you to deposit additional cash or securities to make up for the loss.
3) 401(K) Loans - Many companies offer employees the option to borrow the lesser of $50,000 or 50% of the total amount of the 401(K). The loans can be easy to take but have some serious disadvantages. If the borrower either quits or gets laid off, or the company goes out of business, then the borrower has only 60 days to repay the loan before it's treated as income by the IRS.
4) Cash Accounts - This is a no-brainer for any lender. Money in a savings account makes for great collateral. Lenders know how much there is, and upon winning possession, the cash is easy to collect.
Apart from the above, even insurance policies can be used as collateral assignment. Banks will even consider valuable assets such as automobiles and machinery/equipment. If you fail to make payments, the lender may take possession of such valuables as collateral, sell them, and use the sales proceeds to pay off the loan.
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