Collateral Definition


Collateral is something of value that a borrower pledges at a bank’s request to mitigate the financial institution’s risk in the event of nonpayment. If the customer defaults on the loan, the bank will take the item pledged to recover the money lent.

Secured vs. Unsecured Consumer Loans

Loans backed by collateral are secured loans; those that do not require collateral are unsecured loans. Although most loans need collateral, banks sometimes make unsecured loans for small, low-risk amounts, such as credit cards and overdraft lines of credit. In these cases, the financial institution lending the money is relying solely on a customer’s creditworthiness.

Secured loans require collateral that can come in many forms, such as a car, certificates of deposit (CDs), real estate, boats, and airplanes. In some instances, even personal property, such as jewelry, is considered as collateral.

UCC Collateral for Secured Commercial Loans

Certain types of commercial collateral can be pledged against more than one loan. One common example is Uniform Commercial Code (UCC) collateral. For example, the Acme Company owns equipment, carries inventory, and has accounts receivable worth $5 million. Acme would like to expand and needs a loan of $1 million. The business pledges to State Bank all the assets mentioned above as collateral, even though they far exceed the initial loan amount. Later, Acme realizes, however, that it has underestimated the expansion costs. The company returns to State Bank asking for another $500,000 and pledging the same collateral against its second loan request. At that point, State Bank may consider using the original filing to secure the additional loan. To do so, the financial institution would search the secretary of state’s UCC records to determine if any other banks have a UCC filing on the same collateral. If not, State Bank could file a second lien to secure the new loan in addition to the first one.

Tracking Collateral

In the past, banks may have found tracking collateral difficult. Using a paper filing system, financial institutions relied on manual tickler systems to track renewals on UCC financing statements. This approach was time-consuming and fraught with human error, especially when a piece of collateral was tied to multiple loans.

To increase efficiency in these situations, modern banks are leveraging the power of collateral tracking software such as AccuAccount. For example, confirming current insurance on a piece of equipment would clear exceptions for all loans that are associated with that collateral. Similarly, once a UCC continuation is recorded in the system, it is reflected across all loan files tied to the collateral. Documents are entered into the system once, allowing numerous exceptions to be resolved with a single action.

Banking Resources

For more collateral tracking tips and best practices, be sure to check out our extensive resource library with free spreadsheets, whitepapers, and ebooks.

Browse our banking definitions page for more terminology.

Free Downloads

Bank auditor who is sitting at a desk and reviewing financial statements

Banks Audit & Exam Prep Study

[Study] Banks Audit & Exam Prep Learn how 187 other community bankers manage audit and exam prep. What’s Covered in this Summary Report? AccuSystems recently conducted a survey of 187 banking professionals, representing over $70 billion in combined assets at

Download for Free »
Desk that contains a laptop with the TicklerTrax spreadsheet

TicklerTrax Exception Spreadsheet

TicklerTrax™ Exception Spreadsheet Downloaded 1,000+ Times Looking for a free spreadsheet to track your financial institution’s exceptions? TicklerTrax might be the perfect tool for you! We’ve taken some of the basic logic from our top-rated document tracking system and boiled it

Download for Free »
Banker's desk that contains a stack of documents, a computer, and smartphone

eBook: Compliance & Bank Document Management

[eBook] Compliance & Bank Document Management Compliance is a tricky subject – especially when your financial institution is reliant on paper documents and manual tickler systems. In this free eBook, published by technology company, AccuSystems, you’ll encounter three compliance-related situations

Download for Free »

Related Articles