Collateral Loans: What You Need to Know

Collateral Loans: What You Need to Know

The use of collateral or assets as security for funds is as old as time. The custom features predominantly in the traditions of the ancient Romans and Greeks. Property owners back then would borrow against their lands. The custom also features in Shakespeare's The Merchant of Venice, where the playwright picks it apart.  

Humans have always had to offer items of value in order to borrow money or its equivalent. This practice is now a standard lending practice. Lenders now accept more conventional items as collateral such as cars, real estate, and other equipment. It might surprise you, however, that items for use as collateral are not standardized.

There are instances where the bizarre has worked as collateral too. Lenders have a unique way of gauging items that are of value for lending purposes. Generally, for an asset to make it to the surety class, it has to meet some standards.

Factors that turn assets into collateral

• It has to be something you own

It sounds obvious, but it is worth the emphasis. You cannot put up an item to act as security for credit if you do not own it. This means that you have to have enough documentation to prove ownership. Your rental, therefore, cannot work as surety. Let us say that you are in a business partnership, and your partner is applying for a business loan. They need your property to act as collateral too. What this means is that your name will feature in the loan application documents.

• It must be of significant value

The purpose of the surety is to ensure that the lender has a contingency plan to help recoup the loaned amount perchance there is a default. The item you offer up as a guarantee for the cash should, therefore, hold the value that equals the loan's interest and principal repayments. This is why at times; several assets can be tied up as security for one loan.

• The asset has to retain notable value

The nation 21 lender receiving the surety needs to know that the assets you append for credit will keep their value during the loan repayment period. This implies that some items, though very valuable at present, cannot be used as collateral. Technology, for instance, is one of those items. This asset has a lot of value when new, but its shelf life is very short. There is an advantage to this factor. A lender will be willing to accept a presently undervalued item that will gain value over time. Real estate is a prime example of such an asset.

• It has to be easy to liquidate

Your lender will prefer an item that they can sell off fast in the case of a default in payments. In such circumstances, lenders often take the best price that they will find fast when liquidating the asset. Therefore, they will prefer assets in high demand. This is why real estate works well as surety.

How collateral works

Lenders mostly gravitate towards three types of collateral. Real estate is top of the range as surety, due to its constant value. Self-secured financing has also become a focal point in collateral lending. Self-secured loans do not need property but work more like car loans. Through equipment, financing you can access funds to purchase the equipment required using it the item to secure the funds.

There is also invoice financing. This type of lending allows you to borrow against your business's outstanding invoices. So if you do not have property, you can still find business funding through your accounts receivables at lower rates.

What are secured loans used for?

Over 12 million Americans use secured short-term loans to meet a wide range of financial needs each year. These needs range from medical expenses to home repairs. At times,they may be for vehicle purchases or to get the household over the hump on a bad month. They can be an essential means of pushing people past the day's hardships to a better tomorrow.

Things you should know about secured loans
They need collateral

Lenders today have to comb through your credit history and income before lending cash to you. Banks and credit unions make a living off loan repayments, so they are very risk averse. This is especially so since they use their depositor's cash to run their lending activities.

Theyare, therefore under a lot of pressure to lend right. If they make a mistake, they run the risk of causing significant losses.If you have surety to attach to the loan application form, your lender will have an easier time giving you what you need. You will have more skin in the game, so the chances of defaulting are lowered. If you are unable to meet your end of the deal, all they have to do is liquidate the asset and pay themselves back.

You can access larger loans with collateral

With security for funds, the amount of cash you can borrow is by and large limited on the value of the insurance. Your vehicle, for instance, will give you a couple of thousand dollars. If you have prime property, though, you will be able to access larger amounts. Most lenders, however, have a limit to their lending, so contact them to know how much you can access.

A secured loan comes with its risk to borrowers

A non-secured debt will hurt your lender if you fail to repay them. Your credit score will also take a ding, and you might find yourself in court. A secured debt, nonetheless, will give you more trouble if you fail to pay. You will not only hurt your FICO score but lose your personal property as well. If you are going to take a secured loan and your financial situation changes for the worse, you will be in a lot of trouble. Think through the repercussions of losing your assets before taking the leap.

Your FICO score is not a massive factor with secured advances

If you have a subpar FICO score, your assets could help you access credit quickly. If you have approached your bank or credit union and been turned away for your less than a stellar score, ask them for a secured loan. The surety will bridge the gap between you, your score, and lender and give you an affordable advance. If you pay back on time, you will improve that rating.

What items can you put up as collateral?

Items accepted by lenders vary, but most of the commonly accepted things include automobiles, home equity, boats, bonds, and stocks. There are lenders, however, who take creative collateral such as wheels of Parmesan cheese by Italian Bank, Credito Emiliano.Hong Kong's Lady Finance accepts designer handbags while in China, rubber has been used as surety.

How the valuing will be done

Your lender will evaluate the asset that you provide. Keep in mind that they will set the value of the asset at a figure below the current market price. They do this to protect themselves from fluctuating asset markets. It also safeguards against loss of quality that could happen upon impounding. A good ballpark figure to expect therefore is 80% or less of the asset's actual value. Highly volatile assets such as stocks could have up to 50% less in valuation.

Not all loans need collateral

If the fear of losing your prized assets makes you wary of secured loans, there are other options for financing. Unsecured advances are harder to get because your lender will investigate your credit history as well as your income before lending the cash. If they approve of you, they will probably give you less than you need. The advance will also have higher interest charges attached to it. Do thorough research for a lender with the best rates, therefore, before borrowing.

The final word

A collateral loan can help you access credit financing quickly in a harsh lending environment. Consider all the risks before attaching your assets as surety and approach reputable lenders only.

Last updated:7/31/2019 11:26:23 PM

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