Collateralized Loans: What They Are, How They Work, and How to Use Them to Protect Your Capital

If you’re a high-income professional, you’ve probably heard someone say, “It’s backed by collateral—so it’s safe.”

Sometimes that’s true.

And sometimes that’s exactly how people lose money: they assume collateral automatically equals protection, then discover—too late—that position, documentation, and enforceability matter more than the collateral itself.

Collateralized loans can be one of the cleanest ways to deploy capital because they’re structured around a simple idea: if the borrower doesn’t pay, the lender has rights to the asset pledged as collateral. But the “bank brain” approach is to ask: Do I actually control the downside? If the answer is fuzzy, it’s not a collateralized loan in the way you want it to be.

What this article will teach you

• What collateralized loans are (and what “secured loan” really means)

• Why lien priority is more important than rate

• The core legal tools that make collateral enforceable

• How JBB thinks about cushion (LTV / ARV) and downside-first underwriting

• A practical checklist you can use before you fund a deal

What are collateralized loans?

A collateralized loan is a loan where the borrower pledges an asset as security for repayment—real estate, equipment, receivables, cash value, or other hard assets. If the borrower defaults, the lender has contractual and legal remedies tied to that collateral.

In the JBB world, the most common (and easiest to understand) version is real estate-backed private lending: short-term loans, secured by the property, with lender controls set up to protect principal.

The key idea: the lender isn’t buying a project—they’re owning paper (a note plus a recorded lien) tied to collateral.

Collateral does not equal safety—position and enforceability do

If you want to behave like a bank, you learn quickly that “collateral” is a vague word.

Your safety comes from:

1. Priority (where you sit in line), and

2. Paper (whether your rights are clear and enforceable)

JBB is explicit about lien priority: if you’re new, focus on first lien because it has the highest priority in a foreclosure/workout scenario.

That’s why “secured loan” is not a binary. Two loans can both be “secured,” but only one has real downside control.

The 2 documents that make a collateralized loan real

In real estate-backed lending (the cleanest example for most readers), you typically have two core instruments:

1) Promissory note

The note is the borrower’s written promise to repay—terms, rate, fees, default language, and remedies. JBB calls it the first essential legal protection for the lender.

2) Security instrument (mortgage or deed of trust)

This is what secures your interest in the property and is recorded in public records—so the world knows you have a lien.

Together, these documents are what turn “collateral” into enforceable protection.

The lender’s math: collateral “cushion” via LTV and ARV

A collateralized loan gets safer when there’s a meaningful cushion between what’s owed and what the collateral is worth.

JBB emphasizes a specific way lenders create that cushion: lend against ARV (After Repair Value), not just the as-is value—then reduce the maximum LTV to account for that “future value” inflation. The point is cushion and shorter exposure when markets feel frothy.

This is a big belief rewire for beginners:

You don’t win lending by being optimistic.
You win by structuring so you can be wrong and still get paid.

Extra protections that separate “bank-grade” collateralized loans from handshake loans

Collateralized lending is a system, not a spreadsheet.

Here are a few JBB-style protections that matter:

Title search + lender’s title insurance

Before funding, the title company runs a search to identify liens/claims; then the lender secures a lender’s title insurance policy to protect against unforeseen title issues (errors, fraud/forgery, undisclosed heirs, etc.).

Restrict additional liens

A simple control move: your promissory note can prohibit the borrower from placing additional liens without your written consent—protecting your position during the life of the loan.

Personal guarantee (when appropriate)

JBB describes a personal guarantee as another layer of security—holding a borrower accountable beyond the entity level.

Cross-collateralization (advanced tool)

This allows multiple properties to secure a loan—more collateral coverage, more downside protection, more complexity (so it’s typically not where beginners start).

Belief rewiring: the goal isn’t to “take the collateral”

A surprising number of people subconsciously believe the “win” in a collateralized loan is taking the asset.

That’s backwards.

JBB is blunt about this mindset: the point of private lending is to own paper, collect interest/fees, and have a passive experience—not to become an accidental property operator.

So yes, collateral is there for worst-case scenarios. But your real “win” is underwriting well enough that the borrower succeeds—and you get paid predictably.

Action steps: collateralized loans checklist

Use this as your “bank brain” filter:

1. Define the collateral clearly. What asset secures the loan?

2. Confirm lien priority. Are you in first lien position? If not, do you truly understand your risk?

3. Paper it correctly. Note + recorded security instrument.

4. Run title + get lender’s title insurance. Don’t skip this.

5. Create cushion with conservative leverage. Use LTV discipline; consider ARV-based structure where appropriate.

6. Add controls. Restrict additional liens; define default remedies clearly.