A collateral loan is a loan secured by some asset you own. Basically, you promise to give the asset over to the lender if you can’t repay the loan as promised. By using a collateral loan, the lender takes less risk, and it may be easier for you to get funding. You should know the essentials of collateral loans before you use one.
Collateral Loans 101
Overview of Collateral Loans
Collateral loans are used when the lender wants to be sure they won’t lose all of their money. If you pledge an asset as collateral, they can take the asset, sell it, and get their money back. Unsecured loans, on the other hand, is where all they can do is put a dent in your credit or bring legal action against you.
Assets for Collateral Loans
When using a collateral loan, you are giving the bank the right to take your asset if you can’t repay. Now you may be asking, “What assets can I use?” Here are a few:
- Automobiles
- Real estate
- Cash accounts
- Investments
- Insurance policies
- Valuables and collectibles
- Future payments
If you’re getting a business loan, you pledge assets as part of a personal guarantee.
Collateral Loan Valuation
The lender will usually offer you less than how much your pledged asset is worth. Some assets might be heavily discounted. For example, a lender might only recognize 50% of your investment portfolio for a collateral loan. This is improving their chances of getting all their money back in case the investments lose their value.
If the assets do end up losing value, you may have to pledge more assets to keep your collateral loan. Likewise, you may be responsible for the total amount of your collateral loan, even if the bank takes your assets and sells them for less than the amount you originally owed.
Types of Collateral Loans
You can find collateral loans in a many different places. In certain situations, you get a collateral loan as you buy the asset used for collateral. For example, in premium financed life insurance cases, the lender and insurer many times work together to provide the policy and collateral loan at the same time. There are also some collateral loans for people with bad credit. These loans tend to be pretty pricy and should only be used as a last resort. They go by a variety of names, such as:
- Car title loans
- Auto title loans
- Cash title loans
- Loan for title programs
- Motor vehicle equity lines of credit
Related articles
