Securing Loans with Collateral: Why Bank Accounts Don’t Qualify

When applying for a loan, lenders want reassurance they’ll get repaid. One way borrowers provide this is by putting up collateral – valuable assets pledged as security for the loan If you default, the lender can seize and sell the collateral to recover losses. But not all assets make suitable collateral Bank accounts, for instance, can’t be used to back loans.

In this comprehensive guide, we’ll explore common types of collateral, advantages of secured lending, and reasons why bank accounts don’t work as collateral for personal, auto, mortgage, and business loans.

What is Collateral and How Does it Work?

Collateral is property or assets offered to the lender to secure a loan. If the borrower defaults the lender claims the collateral to mitigate losses. Loans requiring collateral are “secured loans” whereas loans without collateral are “unsecured loans”.

Common collateral includes

• Vehicles – cars, trucks, boats, RVs
• Real estate – houses, land, commercial property
• Investments – stocks, bonds, mutual funds
• Equipment – machines, tools, business assets
• Valuables – jewelry, art, collectibles

The lender places a lien on the collateral, giving them rights to seize and sell it to recoup money if you fail to repay the loan. But you still retain ownership and use of the collateral as long as you stay current on payments.

Benefits of Secured Lending

Secured loans have several advantages over unsecured alternatives:

• Lower interest rates – Collateral reduces lender risk, allowing lower rates.

• Larger loan amounts – Borrowers can access more financing with collateral behind the loan.

• Longer terms – Repayment periods are extended when loans are secured.

• Easier to qualify – Collateral makes approval easier, especially for those with limited credit histories.

• Help build credit – Handled responsibly, secured loans establish positive payment histories.

For borrowers, pledging collateral provides access to affordable, large-scale financing that may be otherwise unavailable.

Why Bank Accounts Don’t Work as Collateral

While most valuable assets can potentially collateralize loans, bank accounts are a notable exception. Lenders don’t accept funds in checking, savings, money market, or certificate of deposit (CD) accounts to secure personal, auto, mortgage, student, or business loans. There are several reasons for this:

No Tangible Value

Cars, real estate, and other physical property have tangible worth lenders can recoup by seizing and selling the collateral. In contrast, cash in a bank account only holds theoretical value for the lender.

Restricted Access

Lenders can’t legally access your bank account funds, even if you pledge it as collateral. They must go through lengthy legal processes to attempt to gain access in default scenarios.

Variable Balances

The balance in bank accounts fluctuates constantly as you withdraw and deposit money. A lender can’t rely on a certain amount remaining available as collateral.

FDIC Insurance

Deposit accounts are insured by the FDIC up to $250,000 per depositor, per bank. This government-backed insurance already protects lenders, making collateral unnecessary.

Alternative Options

Borrowers have assets better-suited as collateral, like cars and real estate. And lenders have other ways to reduce risk, including assessing creditworthiness.

What to Use Instead of Bank Accounts as Collateral

While bank accounts won’t work, almost anything else of significant value can potentially serve as collateral for a loan, including:

Vehicle Title – For auto loans, the vehicle itself secures the financing. The lender places a lien against the car title.

Home Equity – For mortgages and home equity loans/lines of credit, your residence collateralizes the borrowing.

Business Assets – Equipment, invoices, inventory, licenses, and other business assets can back small business loans.

Investment Account – Unlike bank accounts, securities investment accounts with stocks and bonds may qualify as collateral.

Savings Bonds – Certain lenders accept US savings bonds as collateral, although they aren’t as common.

Cash Value Life Insurance – Borrowers can pledge the cash value of whole life policies as collateral.

Secured Loan Tips

If you’re considering a secured loan, keep these tips in mind:

• Only use collateral you don’t mind potentially losing.

• Make payments on time to avoid defaulting and losing assets.

• Try to borrow no more than 80% of the collateral’s worth.

• Understand the consequences if you can’t repay as agreed.

• Weigh alternatives like unsecured loans or improving credit first.

• Compare multiple lenders to find the best rates and terms.

• Carefully read all loan documents to know your rights and obligations.

The Bottom Line

While secured lending has benefits, certain assets like bank accounts aren’t accepted as collateral. Money in checking, savings, CDs, and money market accounts can’t back personal, mortgage, auto, student, or business loans due to legal, practical, and risk factors. Nearly anything else of tangible value can potentially be pledged – cars, real estate, securities, and so on. Just don’t count on your bank account balances to secure financing!