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Collateral loans are a type of secured loans. A collateral is an asset that is presented to a lender before loans are granted. Collateral means surety, guaranty, pledge, bond, assurance, backing.
This can be in a form of a house, car ,jewellery or any other valuable asset. With collateral loans, the risk is not borne by the lender but rather the one placing the asset to the loan.
Collateral loans allow you to get low interest rates. It also gives you a longer time to repay the loan you have taken.
You should know much you will need so as to avoid unnecessary debt. To adequately know how much you can borrow from a lender, you should calculate the monthly expenses against the monthly income.
After making this calculation you can know how much you can afford.
A collateral will determine how much the lender can give to you. Collateral loans can be used for home improvements, vacations and other major purchases.
The lender will usually give you a portion of how much the item is valued. If you have $20,000 the lender may decide to give you $17,000. Some may give you up to 85% of the market value of the asset.
More on collateral loans
Collateral loans are loans given by financial institutions to borrowers based on security that will be placed by the borrower before the loans are granted.
The asset is deposited with the bank or lending institution until you are able to pay back the full amount.
When personal assets are used, the bank is able to easily liquify. The amount gotten can be used for home improvement projects, purchasing household gadgets or consolidate debt.
Collateral generally refers to an asset that lenders can dispose off to get cash should the borrower end up in default.
It is described as a valued item that lenders accept as security to provide loans for those who need them. Investment assets, as well as cash, documents of title can all be presented to get collateral loans.
The particular asset to be used by the lender differs. What may be accepted by one lender, may not be accepted by another.
At other times, the lender holds a cash deposit made by the borrower. The lender holds this amount until the loan is paid back.
When loan seekers provide a collateral, it reduces the risk of the loan to the lender and thus does not make them charge very high interest rate.
The whole issue of collateral does come with the question of where you will get funds to faithfully make the monthly payments towards the loan.
Borrowers also think about where they can get extra funds to cater to other needs during or after they have gone in for collateral loans.
How collateral loans work
Loans that are gotten by collateral have lower interest rates than unsecured loans. Borrowers of collateral loans are compelled to pay it back on time to avoid losing property or assets.
The type of loan you are going in for determines the nature of the collateral loan you will get.
If you are seeking to buy a home, your house is collateral for the loan. In other cases, the borrower will offer an item as which as the same value of the amount being loan.
The collateral must not be more expensive than the amount given out.
Lenders accept the following as collateral.
Cars, bank savings deposits, investment accounts, retirement accounts. To get collateral loans, you should find an institution that you already have a partnership with.
Since there is already a relationship, the bank is likely to accept your loan request and give you good rates for the loan.
Examples of collateral loans
Mortgages are loans where houses are used as collateral.
Once the homeowner defaults on the monthly or agreed upon payments, the lender takes over the ownership of the house.
The lender can then sell the house to get his money back.
Home Equity Line of Credit
You can also opt for a second mortgage from your home known as Home Equity Line of Credit. The amount that will be given to you however, will not be more than the equity available on your home.
For example, a home valued at a total amount of $200,000 and has the primary mortgage of $125,000, the second mortgage will be given up to $75,000.
Home equity lines of credit are revolving. You have the access to credit without applying for a new one. You have a period of 10 years to draw out your credit but whatever you end up using must be paid back with interest.
The repayments may be interest only or you can have it go for the principal. After the draw period, you can ask for an extension.
Other than that, you will automatically be in the repayment phase.
When you enter this phase, you have to make principal and interest payment until you have fully repaid everything (usually 20 years).
Collateral in Margin Trading
Collateral loans are also found in margin trading where an investor borrows money from a broker to buy shares. A margin is the amount of equity that investors have in their brokerage account.
“Margining” or “buying a margin is to borrow money from a broker to purchase a security. You will need to have a margin account in order to effect this transaction.
The margin account is to make money available to an investor to buy more securities than what they can afford with the balance in their own account.
The balance in the investors brokerage account is considered collateral. The loan taken by the investor increases the amount of shares that they can buy.
This multiplies the potential gains of the shares they purchase if it increases in value. The opposite is true if the price of the value of the share falls – the risk is multiplied.
The broker will then demand the payment of the difference.
Collateral loans – the right kind of finance
From old times, borrowers have only had access to loans or funds when they had placed assets on it. The more collateral, the more the funds you can get. Majority of lenders today prefer getting borrowers who will offer security to them.
Borrowers are not deterred by the possible pitfalls that a failure to pay back their loans brings. A few incidences of the inability to repay hasn’t drawn them away from going in for secured loans.
The cost of collateral loans is considered better and the terms are also not strict. Many lenders prefer collateral loans several times over no collateral loans because the risk on them is lower.
Repossession is one of the last resorts that lenders of collateral loans turn to. They give enough leeway for the borrower to pay back what he has used.
Even the thought of the risk of losing their assets makes them not miss their regular payments.
T he Annual Percentage Rate is low on collateral loans ( it can range from as low as 6% to 25%). This may not be so when it comes to other types of loans.
The asset that you present will determine the APR of the borrower with home and real estate having the lowest APR.
Automobiles also have lower APRs when they are used as security for loans buy they are likely to be still higher than the use of homes. With collateral loans where homes are used as asset, it is the equity on the home that determines the amount that will be given to you. Though collateral loans and no collateral loans both have the same repayment options, the payment is relatively made easier for those who opt for collateral loans than for no collateral loans.
Secured vs Unsecured debt
Most loans and finance that you can get broadly falls under two categories: secured and unsecured debt. The major difference between the two is either the presence or the absence of a collateral ( a backing put forward for a loan or security in case of non-payment).
Unsecured debt or loans are loans that has no collateral as backing. It has no security and in case of a default, the lender will have to take sometimes drastic measure to get their money back.
Creditworthiness and the promise to repay are the main factors that lenders consider to give unsecured loans.
Unsecured loans is sometimes known as signature loans. This is because its only the borrowers signature and promise to pay that makes up the loan. Lenders look at your debt-to-income ratio to know if you can afford the loan. Unsecured debt is characterized by high interest rates.
Unsecured debt that individuals have include medical bills, club memberships and the use of credit cards. Credit cards mostly are a line of credit that is extended to individuals without any collateral. It however requires hefty interest charges as previously stated.
Secured debt is when the borrower puts up an asset before securing a loan. The asset seeks to represent the fact that in the case of a default, the lender can use the item to pay for the amount owed.
Examples of secured debt include mortgages, auto loans.
With either of these loans, when you are unable to pay the money you took back, the lender will sell them and use what was realized from it to offset the amount owed.
With secured loans, the risk of default is low as the lender has nothing to lose. The interest rates are also low for the borrower.
The lender will sometimes require that these asset be maintained or insured properly to maintain the value.
So that in the event of anything the value of the asset is not affected and there can be some recovery for the lender.
What can be used as collateral?
When it comes to what can be used as collateral, there are different options depending on what the lender also wants.
Presenting a savings account, or your car or a certificate of deposit will suffice since the value of these are in clear terms to the lender once you’re the owner.
Bringing Auntie Sue’s china set may not be a good idea because liquidating it may not be too easy. In the end, whichever collateral will be presented will all depend on the lenders requirements.
Business collateral loans may require equipment or machinery as collateral.
Places to find collateral loans
Collateral loans can be found in different financial institutions but the interest rate varies. Some of the lenders include
#1 National banks – These are large banks which offer a variety of financial services. National banks have been the go-to lenders from time immemorial . They are a good option when you are looking for collateral loans. Your loan application works better if you are already their customer and that is the only option for you.
#2 Credit unions – Credit unions are one of the best places to get collateral loans. Because of their self help nature they are more interested in the well – being of their members.
You can have collateral loans from credit unions at lower rates and good terms.
As membership determines the services you can received from credit unions, you have to either work, live or be part of their religious services within their field to have an account with them.
Without being a member, some of the benefits will not be extended to you.
#3 Online lenders – Online lenders provide borrowing opportunities for those who may not be able to get collateral loans from mainline lenders.
Their operations over the web will enable you get the rates that you want. You have the option to check all the terms and conditions available before signing on to the loan.
#4 Community banks – These community banks similarly operate like credit unions but on a more formal scale.
They work with the local populace or citizenry and are like banks. They do have the challenge of having to compete with the larger banks for businesses.
Their services may not be on a large scale as the national banks will have it but they offer competitive rates on their loans and ensure that the best is offered to their clients.
Collateral loans gotten from community banks are negotiated on the finest terms.
Alternatives to collateral loans
It is widely accepted that getting collateral loans is easier since you can negotiate good terms with your asset. In the case where you do not have any, where do you turn to?. That is why alternatives have been established so that it serves as another option when you cannot get collateral loans.
• Unsecured personal loans
This is when you get a loan without placing anything of value on it. You however, give a promise to pay back the loan.
These loans do come with high interest rates and more risk. A default on the loan can adversely affect your credit score.
• Credit builder loan
Credit builder loans are for the purpose of making it easy to build or work on your credit history. Credit builder loans train you to make regular payments. The main aim is to have a better score hence all efforts are concerted towards that.
Credit builder loans When you have little or no credit, you can turn to a credit builder loan. What happens is that the lender will deposit funds in an account for you and keep it for the term of the loan.
You pay back the lender for the money held for you in installments.
When the term of the loans is due and you have been able to pay back what they held in deposit for you, you are given the money.
You need not have good credit to be approved for credit builder loans but you should have income to be able to make the payments.
Every prompt payment that you make goes to the three credit bureaus Equifax, Experian and TransUnion. Payment which are 30 days late can affect your credit score. You should also personally monitor your credit score on a weekly basis to know where you are.
The improvement may not be huge figure at first but gradually, it will be better than when you first started.
On-time payments make a big difference on the credit report. You can then qualify for more loans when you need them.
• Borrowing from friends and family members
If you will not be able to risk your assets on a loan, it is best borrowing from someone you know.
This has its own disadvantages though but you are more likely to be approved of collateral loans from friends and family.
Your relationship can be at risk if you are not able to pay back the loans that you take. The decision is yours whether it will be a good option for you.
But if you are confident that you will be able to pay back, you can take it. The case will be different if you are already struggling with some debt.
It will be best to clear it off before you think of going in for a collateral loan that might just bring more strain to your finances.
Benefits of collateral loans
– It’s a loan that can be quickly approved. When you’re having it hard to be qualified for loans possibly due to bad credit or no credit history, collateral loans can be a bailout since you don’t pose a risk to the lender.
– You can borrow more with collateral loans. The offering of a collateral for the loan increases your chances of getting a higher amount than you want.
– Secured loans are a good alternative after you have been turned down by lenders.
– The lender will charge competitive interest rates.
– It provides short term cash flow. If you are finding it difficult to convert your money to cash, collateral loans can get you hands on money that you need for your purcheses without a long drawn out process.
Disadvantages of collateral loans
– You may lose the asset you placed on the loan if you are not able to pay back on time.
– Collateral loans have a limited number of assets that may be accepted by the lender. If your asset doesn’t match what the lender needs, you may not get access to the loan.
– It requires something of value before you can get the loan you are seeking for. If you do not have any asset to present lenders may not release the loans to you. Hence if it was for a pressing personal purpose or a debt, the one you owe may come after you for their money.
Experts advice that you should be on the look for prepayment penalties and other fees that are charged if you want to pay back collateral loans before the time is due.
They are not a permanent solution to cashflow problems. There must be some alternative arrangements that you make to keep you going other than a constant resort to loans.
If you find the right lender willing to give you collateral loans, you can opt for them. The main thing to remember is that like any other loan, collateral loans will still have to be paid back.
Late payments can affect your credit score.
Unexpected medical bills and other payments do crop up every now and then. This situation can demand immediate attention but what if you do not have an item to present to the lender before you get your loan?
Does that mean that is the end for you? Certainly not! There even exists “no collateral loans” for those who’s credit is not too great.
No collateral loans are loans that do not require an asset before you get the loan.
To get no collateral loans, the lender will however ask for your proof of income from your work pay stubs from your checking account.
You can compare the rates from several lenders to compare their interest charges and other fees that come with the loan you apply for.
Disclaimer: All loans offered through this website are subject to credit and underwriting approval. AfterLoans.ca is a lead referral company, not a lender. AfterLoans only works with financial service providers that adhere to Canadian laws and regulations. Our lenders lend from $500-$5,000. Loans amortization is between 6-36 months. APRs range from 19.99% to 55%. The actual APR charged will depend on the lender’s assessment of your credit profile. For example, on a $1000 loan borrowed for 12 months at 29.9%, the monthly payment will be $97.24; with a total repayment, including interest, of $1166.88 There is also lender’s optional loan protection policy. In the event of a missed payment an insufficient funds fee of around 45$ may be charged (dependent on the lender). If you default on your loan payment plan the lender may terminate the plan and the remaining balance will become payable immediately. Our lenders employ fair debt collection practices, but will pursue the payment of Outstanding debts to the full extent that Canadian law allows.