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What is the difference between using collateral and taking out a loan?

Curious about Collateral

What is the difference between using collateral and taking out a loan?

Using collateral and taking out a loan are actually not mutually exclusive, as collateral is often required in order to secure a loan. Collateral is something of value that a borrower pledges to a lender to secure a loan or other type of credit. This collateral serves as a guarantee to the lender that if the borrower is unable to repay the loan, the lender can seize the collateral to recoup their losses. In contrast, taking out a loan simply refers to borrowing money from a lender, either with or without collateral, and agreeing to repay the loan over time with interest. So, the main difference between using collateral and taking out a loan is that collateral is a form of security that can be used to help a borrower qualify for a loan, and it reduces the lender's risk by providing an asset to fall back on if the borrower defaults on the loan.

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