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We were talking today at work and I am curious...
Say an individual (Mary) is looking at a 20k bank loan. Mary has no assets to secure the loan. Could some else (Joe) (parent, friend, sibling,whoever) lend Mary the collateral, say a title or something in Joe's name, for the loan without being the co-applicant?
Or since Joe owns the collateral would he have to be the joint owner on the loan??
Or What other options would Mary have?

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    The lender would much rather have the cash than the collateral. Thus, if Mary is the sole borrower and Mary defaults on the loan, they could get the collateral pledged by Joe but they would much rather have the money. Joe is under no obligation to repay the loan so as to avoid having to part with the collateral, and so unless the collateral is particularly dear to Joe (first-born son, favorite Beemer), he may well decide that he is better off having gotten rid of a white elephant with a minimum of hassle. – Dilip Sarwate Dec 1 '15 at 4:01
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Joe couldn't just pledge the collateral, they would have to put it at risk.

For a 20K loan, the bank would want to add the bank's name to the car title that Joe is using for collateral. That would mean that Joe couldn't sell the car until Mary has finished paying the loan. If Joe had to sell the car, the money from the sale would go to the bank because they needed to make sure they protected the investment. The bank would also put requirements on insuring the car, again to protect their investment.

Joe would want to be listed on the loan because they would want to know if Mary was missing payments; otherwise their first notice would be when the tow truck arrives to collect the car/colleteral.

  • +1, to your first sentence, I think that's what OP meant. – JoeTaxpayer Dec 1 '15 at 13:40
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    Acutally the sentence is logically short circuited (but makes sense as answer). Pleading the collateral IS putting it at risk per the definition of what pledging collateral means. – TomTom Oct 31 '18 at 8:48
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This would depend on the internal policies of the financial institutions. In past this arrangement was possible and was called a "Guarantee". i.e. someone stands Guarantee that the loan will be paid else he would pay the loan.

Of late this arrangement is not working well, in the sense that the Guarantor has nothing to lose if his name is not on the loan [i.e. it does not affect his credit score etc] and often resorts to techniques to not pay the loan. Depending on the regulations of the country it may or may not be easy to cash the collateral given by the Guarantor.

A better way for financial institutions and more of a standard practise is to have the Guarantor on the loan. This way if the loan defaults his credit score is at risk and future borrowing is also at risk.

protected by Community Jul 17 at 2:12

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