How Do Collateral Loans Work?

You’ve probably heard of secured and unsecured loans, right? Or maybe loan security? No? What are secured loans? Lenders usually take collateral or security when providing loans, especially for large amounts as a means of protecting themselves. This basically means if you’re unable to pay the loan completely or the full amount, the lender can sell your security to offset their principal plus any interest that has been accrued. One may think that most banks that offer secured loans may not care too much about one’s credit history. Not accurate. These banks look at a variety of factors and collateral is just part of the equation, which helps you to be approved more easily. Let’s look at some reasons which generally make banks and other lenders to generally prefer these loans.

Why Are Personal Loans With Collateral Generally Preferred?

With collateral, the lender is less exposed in case of default, which might even get you a great interest rate. On the flip side are unsecured loans, which expose the lender more and generally introduce the concept of litigation in lending, which is something all lenders try to avoid. While you never go into debt anticipating default, the chances of this happening are very real. Corporations and wealthy individuals who are unable to repay their loans usually end up filing for bankruptcy protection, which effectively means their lenders cannot come to claim from them until they refinance and reorganize their debt. Types of secured loans include vehicle loans, mortgage and property loans, boat loans, and home lines of credit.

Another situation that happens is when you take out a loan with assets as collateral, and these assets have to be sold at a lower value than they actually claim, otherwise known as the Forced Sale Value or Loan-to-Value ratio (LTV). Loans using car as collateral are the best examples of these. Basically, if you bought a car at 100,000 dollars and use the house as collateral, the bank may only consider the value once sold to be 70,000 dollars. Therefore they will advance credit equal to the LTV and will claim the car for their 70,000 dollars regardless of the fact that you bought it for 100 grand. This protects the lender such that in case of a default they recover all their money back. On the flip side, it means if you default, they sell your hard-earned asset for a fraction less than what you acquired it for.

Some assets such as vehicles lose value with time and should the bank be forced to sell your vehicle due to default at a price even less than what they themselves had anticipated, you will be forced to cover the surcharge.

Loans using home as collateral offer great principal because real estate appreciates in value with time. This is the reason why real estate collateral loans, otherwise known as mortgages are quite popular. In fact, in mortgage financing, the lender provides credit to purchase the asset and uses the same asset as collateral. Property collateral loans are a great option if you’re looking for a large sum of capital to finance a business and you are sure that you will be able to make timely payments on the loan, otherwise defaulting will ultimately lead to foreclosure.

Secured personal bank loans are usually the safest options for big lenders, although there are some who are willing to give credit without collateral in exchange for higher interest. Secured student loans are also provided to students with a good credit history and possibly those who can have a cosignee to guarantee an asset.

 Facts about Collateral Loans Bad Credit

While you may have a terrible credit history, you may be in dire need of cash and may have some collateral that you are able to provide. Collateral personal loans for folks with bad credit are provided because of the guarantee that collateral provides. Getting a loan with terrible credit history is a challenge, especially if the loan is unsecured. The biggest challenge with loans for bad credit is the fact that they levy conventionally higher interest than other secured loans. The upside to this is the fact that you can improve your credit rating if you make timely payments and if you repay the principal and interest on time. Lenders also love people who can provide a form of cash security, usually a percentage of the loan amount. This is usually prevalent for businesses looking for large loan amounts and which already have sizeable cash reserves which may not fluctuate much over the course of the loan period.

These loans are always available seeing as they take collateral. The type of loan that you will apply for depends on your immediate needs and may include asset loans, collateral car loans and other types of personal loans. There is also no maximum amount that you can borrow, although the exact amount may vary from lender to lender.

Most secured loans for folks with bad credit usually use vehicles as collateral. These are known as auto equity loans and let you borrow against the future Forced Sale Value of your car. Lenders taking vehicles as collateral usually require that you insure it against physical damage, with the lender as the loss payee in the case of total damage. The same lenders may sell you credit insurance which in most cases is worth much more than the value of the car itself. An even worse option are auto-title loans which have extremely have interest rates, with a higher risk of vehicle repossession.

The best options before taking any loan would be to look at your repayment capabilities. Always remember the risk of the unknown, such as loss of income or turbulent financial times. Only borrow what you are sure you can comfortably repay within deadlines.