Bank Money Collateral Loan Understanding Interest Rates People

When people want to borrow money from a bank, they often have to "put up" (offer or provide) "collateral," which is something that they agree to give to the bank if they are unable to pay back the loan. Common types of collateral include homes, cars, small businesses, valuable artwork, and more. The bank "assesses" (evaluates) the "value" (how much something can be sold for) of the collateral and then decides how much money it can lend to a particular borrower.

Unfortunately, sometimes people are unable to pay back their loans. This often happens if they lose their job or if they have high medical expenses. When a person defaults on a monthly payment for the first time, the bank usually asks what happened and tries to "make arrangements" (make plans for something to happen) so that the money is paid as soon as possible.

However, if a borrower defaults on a loan for several months "in a row" (consecutively, or one after another), then the bank may "repossess" the loan's collateral or the thing that was purchased with loan money. For example, a borrower who "takes out" (borrows) a car loan and then isn't able to make the monthly payments will usually have his or her car "repossessed," meaning that the bank becomes the new legal owner of the car.

When a bank repossesses a home, it is known as a "foreclosure." The foreclosed "property" (a building and the land it is on) is then owned by the bank. Banks don't really want to own homes, so they usually try to sell their foreclosed properties to "recover" (get back) the money they lost on the loan.