Collateral Loans: Everything You Need to Know

collateral loans

Do you need cash for an urgent expense but you don’t want to max out your credit card? Collateral loans may offer you the money you urgently need but under some conditions.

Loans with collateral enable you to secure the borrowed amount at a low-interest rate. It’s, therefore, a lot easier to get a loan when you put up collateral like your car or home. However, you risk losing the valuable asset if you default on the loan.

You’d want the best possible rate when shopping for a collateral loan. Understanding how this type of funding works can help you negotiate an ideal repayment period. Read on to learn how loans with collateral work and how to find one.

What is a Collateral Loan?

It’s also referred to as a secured loan. This is a loan with collateral and is usually guaranteed by a valuable asset you own. The lender has every right to withhold the collateral if you default multiple repayments. In this case, the collateral can be your car, real estate, or piece of jewellery.

Collateral loans offer larger loan amounts and lower interest rates, unlike unsecured loans. They can be your best option if you have an unsteady or short credit history. If your income level doesn’t qualify you for an unsecured loan, you may also take one.

Common Types of Collateral Loans

The common types of loans with collateral include residential mortgages, home equity loans, and auto loans. Others include car title loans and personal loans.

The lender will use your house as collateral when taking a residential mortgage. You risk losing the property in foreclosure if you fail to repay the loan. Like a mortgage, a home equity loan is taken against a house and features a fixed interest rate.

Auto loans have the best interest rates and use the vehicle you intend to buy as collateral. On the other hand, car title loans have a repayment period of 30 days and are borrowed against a car title. If you’d like to use your personal savings account as collateral when you need a loan, taking a fixed personal loan may help.

How Do Collateral Loans Work?

Expect to find more attractive loan terms and conditions when taking a collateral loan. You’ll enjoy a lower interest rate, a longer repayment term, and a large borrowing amount.

The lender will take some time to determine your collateral’s worth. They’ll look at the asset’s fair market value or appraise it in the process.

The rates for this kind of loan depend on the kind of collateral you want to use. Residential mortgages have a typical rate of 3 per cent, while home equity loans vary from 3 to 10 per cent. Car title loans come with rates between 4 to 15 per cent depending on the lender.

Expect to pay an interest rate of up to 25 per cent per month on a car title loan. The rates for a personal loan are between 9 to 22 per cent.

Their Pros and Cons

Taking a loan with collateral is one of the effective ways to borrow money. However, this type of funding carries certain benefits and risks that you should consider.

On the positive side, the likelihood to qualify for the loan is high even with a short credit history. You may also be eligible for a large amount or even borrow more. Loans with collateral offer short-term liquidity on assets you can’t easily convert into cash.

One downside of a collateral loan is that you could lose your valuable asset for failing to repay the loan. The lender will also require you to have a valuable item to use as collateral.

Always review the prepayment penalties before taking any loan with collateral. Since the funding won’t offer a permanent solution to your cash flow problems, develop an exit strategy. Use the amount for a specified goal and pay it off when you can.

Where to Find a Collateral Loan

Though most financial institutions offer loans with collateral, their rates and terms may vary. Consider banks, credit unions, online lenders, and auto dealers in your search for one. You may also visit storefronts like pawn shops for the same, but with very high-interest rates.

A bank can give you this type of loan if you have an existing account with them. If you’d like a car loan, some banks may restrict you on the car’s model, make, year, and mileage.

Credit unions, which boast low rates, can offer you one only if you’re a member. Some online lenders offer collateral loans if you provide proof of ownership to the collateral. You may also get one from an auto dealership to buy a car of your choice, provided you have strong credit.

How to Apply For One

As you apply for a collateral loan, check your credit, choose the collateral and gather relevant documents. Shop around for favourable rates, choose a lender and apply

for the loan.

You may qualify for the loan with a short credit history, so always ensure your credit reflects the lender’s terms. With good credit, it’s easier to get low rates and favourable repayment terms. Choose an asset to use as collateral and avail your personal information to the lender.

When shopping around for the best rates, get multiple quotes and choose one that fits your needs. After applying, you may receive the money within a day or several weeks if it’s a mortgage.

Consequences for Defaulting on a Collateral Loan

Most lenders may consider the loan default after 30 days of missing a payment. They may allow a short grace period and an opportunity for you to adjust the payment plan.

If you fail to pay the loan with all the incentives, you’ll lose the asset. Carefully lead the contract to understand the payment obligations and review your local laws on the same.

Need More Insights on Collateral Loans?

Though they bear some risk, collateral loans can help you solve an urgent financial issue. They boast low-interest rates and are easy to obtain. Understand their terms before applying for them to avoid losing your most valuable assets.

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