Let’s dive deeper into what collateral is and how it works with a secured loan so you can determine if this type of product makes sense for your unique situation.
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What Is Collateral?
If you apply for a secured loan, you’ll need collateral, which is an asset or something valuable you own.
While collateral requirements vary from lender to lender, a home or vehicle is the most common types of property you may use to take out a secured loan.
Categorically, speaking Collateral is an asset or property that is pledged as security against a loan.
In other words, it is something that a borrower offers to a lender as a guarantee that they will repay the loan according to the agreed terms.
Common examples of collateral include real estate, vehicles, stocks, and other valuable items. If the borrower defaults on the loan, the lender may seize the collateral to recover the money owed.
Collateral helps to reduce the lender’s risk, as it provides a form of security in case the borrower is unable to repay the loan.
It is important for borrowers to understand the value and importance of the collateral they are offering, as well as the terms and conditions of the loan agreement, before taking out a secured loan.
Other acceptable types of collateral may include:
- Cash in a savings account or certificate of deposit (CD)
- Stocks and bonds
- Insurance policy
- Jewelry
- Fine art
- Collectibles
What Is A Secured Loan?
One common question people ask when choosing a loan type is, “What is a secured loan? A secured loan is a type of loan that is backed by an asset, also known as collateral.
If you fail to make your loan payments and default on the loan, the lender has the right to seize the asset you provided as collateral.
By doing so, the lender can resell your asset and recoup some or all of the money they lost.
Secured loans are a type of borrowing that requires collateral to be put up against the loan.
This collateral can be in the form of an asset such as a home, car, or other property that the lender can take possession of if the borrower fails to repay the loan.
The advantage of a secured loan is that it typically allows for a larger loan amount and a lower interest rate compared to an unsecured loan, which doesn’t require collateral.
However, the borrower needs to be aware that defaulting on a secured loan can result in the loss of the collateral, so it’s important to make sure the loan can be repaid in full and on time.
How Secured Loans Work
Compared to unsecured loans that don’t involve collateral, secured loans tend to offer more attractive terms.
This may include a lower interest rate, longer term, and a larger borrowed amount.
Before approving a secured loan, the lender will determine how much your collateral is worth.
Then, they’ll use this figure to determine the loan size they are willing to offer you.
In most cases, you’ll be able to borrow a percentage of what your collateral is worth.
When applying for a mortgage, for example, a lender considers factors like the property’s appraised value, the neighborhood’s status, and the potential resale value of the home you hope to own.
Where To Find Secured Loans
Fortunately, there is no shortage of collateral loans on the market. Here are some places you can turn to for these products.
- Banks: If you already have a checking or savings account with a bank, you may be able to get a secured loan through them too. Keep in mind that banks often have strict credit requirements.
- Credit Unions: While credit unions require you to become a member, their secured loans often come with lower rates than you’d get elsewhere.
- Online Lenders: Many online lenders offer secured and unsecured loans with a simple application process and quick approval. So, you don’t have to leave the comfort of your home to get the funds you need.
- Car Dealerships: Car dealerships might make sense if you’re looking for a car loan. While many dealerships may offer competitive rates, you’ll find the best rates if you have a good credit score.
Benefits Of Secured Loans
While collateralized loans require you to put a valuable asset on the line, they also offer several advantages, such as:
- Easier to Qualify: Since secured loans involve less risk than unsecured, non-collateral loans, they may be easier to get even with less-than-stellar credit.
- Lower Rates: You can get a competitive interest rate on a secured loan by pledging collateral so the lender can recoup any loss if you default on the loan. This can save you hundreds or even thousands of dollars over its term.
- Larger Borrowed Amount: If you have a large expense like purchasing a house or car, these loans offer more significant amounts for borrowing, such as tens of thousands or hundreds of thousands of dollars.
Keep in mind, however, that a loan for a house or car requires that the borrower make a down payment and in the case of purchasing a home, provide extensive financial information beyond what is in a credit report.
The Bottom Line
As long as you have eligible collateral, you may be able to get a secured loan to cover the cost of a house, car, or other expenses.
When used responsibly, a secured loan can be a useful tool for accessing funds needed for large expenses or investments.
Remember, you may not need perfect credit and may be able to land a low rate and/or a higher borrowing amount. However, keep aware that you are risking the asset if you default on payments.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of The Small Business Blog or its employees.
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