Did you know that 34% of Americans took out a personal loan last year? Are you in need of money right now but not sure what your best option is?
In this article, you’ll learn about a collateral loan and how you can get money fast. Read on to discover the benefits of a collateral loan so you don’t drown in debt.
What is Collateral?
Collateral is an asset that a lender uses as security for a loan. If you default on the loan, then the lender can take the asset(collateral) and sell it to gain back the losses.
Collateral is:
- Backup for a loan payment which adds security for the lender
- An asset that the lender can take if you default on your payment
- An item that a borrower promises in order to secure a loan
Since there is collateral attached to the loan, they are normally offered at much lower interest rates than an unsecured(no collateral) loan.
What Can Be Used as Collateral?
You can secure a collateral loan using an asset with value. For example, an auto or mortgage loan uses the car and house as an asset. High-value personal loans, the lender will normally accept paintings and jewelry.
Collateral could include:
- Personal or business savings
- Personal residence
- Business property
- Inventory on hand
- The business itself
- Money from accounts receivable
When you offer collateral and you default on the loan, you’re giving the lender the right to take control of the asset.
Examples of Collateral Loans
Collateral loans are actually a pretty common loan for both businesses and individuals.
Personal Loans. Personal loans are used by consumers to consolidate debt. They can either be unsecured or secured(collateral attached). An example of your assets used could be your home, investments, savings, or auto.
Mortgages and Auto Loans. These are the most common types of secured loans. When you purchase the asset(home), it’s used as collateral against the loan. Lenders often only approve the loan if the value of the home is above the sales price or matches it.
Small Business Loans. When starting a business, there are many upfront costs a business could need to pay. Collateral for this type of loan could be inventory, future payments from customers, and real estate.
In some cases, a lender might require a written promise from the borrower stating their personal assets can be taken if they default on the payment of the loan.
Advantages of Collateral Loans
There are many pros to getting a collateral loan including:
If you don’t have perfect credit they can be easier to obtain. Credit history can be a smaller issue with collateral loans than unsecured loans. When you offer collateral, you lower the lender’s risk, so they will feel more comfortable giving you a loan when they have collateral.
When you apply for unsecured loans they normally expect you to have a strong credit history.
You could borrow more money. When you obtain a collateral loan, it gives lenders something to recoup from if you default on your payment. Since they have the asset as a backup, they could feel more comfortable giving you a higher loan amount.
It helps you build credit. Whether you have no credit history or a little, a secured loan can help you build your credit. Just make sure to pay your payments on time.
Lower interest rates. Since collateral lowers the risk of you not paying back your loan, lenders offer more reasonable interest rates. When it’s unsecured, interest rates can soar for the lender to protect themselves. It’s then easier to pay off the monthly payments when you don’t have a high-interest rate.
Cons of Collateral Loans
As with anything, there are pros and cons to collateral loans:
You could lose your asset if you don’t make payments. If you don’t make your payments on time, the lender could take your asset and resell it for a profit to recoup their losses. Make sure you feel completely comfortable with the monthly payment on the loan and paying it on time.
The application process could be more complicated. You might need to provide more information such as information about your asset, whereas an unsecured loan you wouldn’t. The time it takes varies from lender to lender.
Loan Options
When you apply for a secured loan, you can choose the type, amount, and terms suitable for you or your business needs. They’re often used for larger purchases such as startup costs, renovations, equipment, etc.
Since lenders feel more comfortable with the loan since an asset is attached, you can also avoid being locked into a higher monthly payment than you’re comfortable with. If you need a longer payback period for the loan, lenders will feel more comfortable with this due to the collateral.
Possibilities of Negotiation
Lenders know the value of collateral, so you’ll have more room to negotiate your terms of the loan. When you’re ready to learn more about collateral loans and apply, you can then choose the best form of loan for you.
Next Steps
While searching for the right loan can seem overwhelming, when you need money fast with a low-interest rate, a collateral loan could be the right fit for you. Follow these tips and pros to see if a loan with an asset matches up with your needs.
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