What can you do when you need to borrow money, but aren’t sure you qualify for a standard loan?
If you have a low credit score, expect to pay high finance rates on something big like a car or home.
To avoid paying higher fees, try a collateral loan. You guarantee the loan by securing it with something valuable you own.
Keep reading for a beginners’ guide to collateral loans. You’ll learn how they work and common ways you can use them.
Collateral Loans Explained
When you borrow from a bank or financial institution it is either secured or unsecured debt.
A collateral loan is a secured loan. It’s guaranteed by something you own, like a car or a house.
The collateral protects the lender if you default on the loan. If you don’t pay your debt, the lender keeps the collateral.
You get a better rate on a secured loan because the lender has less risk. The rate is better, but if you can’t repay the loan you lose your collateral.
When you borrow without any collateral backing the loan it’s an unsecured loan.
Types of Secured Loans
There are many kinds of collateral loans, including:
- Automobile
- Recreational Vehicle
- Mortgage
- Home Equity Loan and Home Equity Lines of Credit
- Secured Personal Loan
- Small Business Loan
The most common secured loan is a mortgage. Your home secures the loan. Secured auto loans that use the car as the collateral are also popular.
If you don’t make loan payments, the lender can foreclose on your loan. That means the lender takes possession of the property.
A secured personal loan can be a flexible solution to a big expense. You can use the money to cover medical bills or pay for a wedding.
Not all secured personal loans are the same. Research different lenders to find the best loan offer for your situation.
Each lender offers terms based on the borrower. They consider your income, credit history, current debt, and more.
Approval for a secured loan is easier because the collateral reduces the lender’s risk.
The Advantages of Collateral Loans
A collateral loan is an effective way to borrow, but there are risks. First, let’s look at the advantages of a collateral loan:
Short-Term Liquidity
If your assets aren’t easy to convert into cash, a collateral loan can help you get money fast. You won’t have the extra burden of selling your assets.
Easier Approval
Do you have credit issues or limited credit history? A loan secured with collateral can make you more appealing to lenders. A collateral-backed loan reduces the risk for the lender.
Larger Loans
The lender may loan you a larger amount since collateral guarantees repayment.
The Disadvantages of Collateral Loans
It’s important to consider the disadvantages before you commit to a secured loan. They include:
Losing Your Asset
If you don’t repay the loan you can lose your asset. This is a huge risk when you secure a loan with your home or car.
You Need a Valuable Asset
If you can’t qualify for an unsecured loan, you need a valuable asset to get a secured loan. If you don’t own the collateral needed to secure a loan you’re out of luck.
Early Payment Penalty
Check the loan agreement for prepayment penalties. Some lenders charge a fee if you pay the loan off early.
A secured loan isn’t a permanent solution to money problems. If you have cash flow issues make a plan. Have a specific arrangement for using the loan, plus a plan to pay it off.
What Qualifies as Collateral?
What kind of asset can you use for loan collateral? It depends on the lender’s requirements. In most cases, the asset must be easy to value and liquidate.
A car or savings account is acceptable because they’re easy to assess and sell. A family heirloom may not meet the lender’s standards. A valuable coin collection may qualify, but Aunt Helen’s doll collection might not.
The most common types of collateral are:
- Savings Accounts
- Certificates of Deposit
- Life Insurance Policies with a Cash Value
- Jewelry
- Autos or Recreational Vehicles
- House or Real Property
You must own the asset to use it as collateral. Retirement accounts are not usually accepted.
Lenders often accept machinery and equipment to secure small business loans. Some small business loans ask for personal assets as collateral.
Where Can You Get a Collateral Loan?
Most financial institutions offer secured loans. The terms and interest rates vary among lenders. Start your loan research with the following lenders:
National and Community Banks
Larger national banks have the most financial services. It’s a good option if you’re already a customer. National banks have many convenient locations.
Smaller community banks like to work with local customers. They offer competitive terms on loans to get your business. A community lender can feel more personal than a national bank.
Credit Unions
Credit unions are another option. Credit unions are non-profit co-ops owned by their members. They offer lower interest rates and attractive terms on collateral loans.
You must belong to the credit union to apply for a loan. Members join based on location, school, work or religious affiliation. Members must maintain a savings or share account.
Online Lenders
Online banks have loan opportunities you can’t find nearby. Online lenders can offer lower interest rates since they have low overhead.
Online lenders are convenient and fast. If you need fast, efficient access to cash an online lender is a good source for short-term loans.
Choose an online lender that lets you prequalify. Then, you can check actual interest rates and terms before applying for the loan. This prevents a hard credit inquiry which can affect your credit scores.
Ready to Apply for a Loan?
Always research different lenders and finance rates before you apply for a loan. Consider all the different types of loans available. Make a plan based on your finances, credit score, and ability to repay the loan.
Collateral loans are a good idea if you know you can repay them. Don’t add a collateral loan to your debt if you’re already struggling.
If you need cash to take care of a money problem fast, contact us for a quick loan.
