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Collateral assignment is a term used to describe the pledging and temporary transfer of ownership rights to a lender in return for the granting of a loan. Once the loan is paid in full, those rights revert to the debtor, and the lender no longer has a claim on those assets. Various types of collateral may be accepted by a lender, depending on the nature of the loan and the type of assets a given borrower has to offer. This in turn means there are a few different types of collateral assignment that may take place.
One of the more common examples of collateral assignment involve the pledging of real estate, and the temporary transfer of ownership rights to the lender. For example, if a borrower wishes to use a loan to purchase some type of recreational property like a cabin at a lake, the lender may accept the borrower’s primary residence as the collateral for the loan, and require that ownership rights be transferred to the lender for the duration of that loan. In practical terms, this means the borrower will continue to be responsible for the pledged property, including the payment of any property taxes that come due. In addition, the property cannot be sold without the express permission of the lender, although in most cases the borrower can lease or rent the property without having to seek permission from the lender.
Another example of collateral assignment involves the use of the cash value of a life insurance policy. In this scenario, that cash value is pledged as the collateral on the loan. In the event that the borrower should pass away before the loan is paid in full, the proceeds from the life insurance policy are used to retire that debt. Any amount remaining from the life insurance benefits are then passed on to the beneficiaries.
In any form, collateral assignment involves transferring ownership rights to a lender for the duration of a loan period. Typically, the borrower still has use of the asset and remains the owner of record. All responsibilities connected with that ownership are still retained by the borrower, and he or she can make use of the asset with little to no restrictions. As long as the loan payments are tendered on time, the lender will usually not attempt to exert any type of control of the asset pledged; only in the event of a default will the lender exercise the right to seize full control of the asset, settle the amount of the defaulted loan, then forward any remaining revenue from the sale of that asset to the borrower.
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