What is a Collateral Loan and How Do They Function?
When you urgently need money for a significant expense, you might be tempted to clear out a credit card or borrow from a shylock. But there are a myriad of options that you can explore without having to hurt your credit rating.
Collateral is something of value that helps secure a loan. It is precisely the case when a granter agrees to lend you cash on the contractual binding. But only if they can sell the asset to recover their money if you fail to repay the loan. If you are considering taking on a secured loan, it’s essential to understand how collateral loans work. Don't use plagiarised sources.Get your custom essay just from $11/page
Types of collateral
The collateral required depends on the amount you want to borrow and the loan type. So, what can be used as collateral?
Real Estate
Using home equity as collateral when applying for a small loan is a standard feature. That commonality, primarily to lenders, trickles down to a few key aspects: Real estate assets are valuable, they retain value over time, and are widely available.
Savings
Lenders also prefer savings as collateral. And you can easily understand why- a bundle of cash ensures that the shylock can regain losses while avoiding the hassle that comes with selling a real asset.
Invoices
If you’ve your loyal customers and they are slow to pay up, you’re bound to hit a snag when conducting daily business operations. Lenders can help you keep your business afloat through a collateral loan solely based on outstanding invoice balances.
Examples of collateral loans
We outline some consumer loan types to depict the most famous cases of collateral:
Personal loans
They are used by consumers to service existing debts, finance everyday expenses or build credit rating.
Auto Loans & Mortgages
These two are the most common types of collateral loans utilized by customers. Most lenders demand that assets be estimated to gauge the real value of the collateral.
Repossession
If you don’t pay up the loan within the agreed period, the lender is obligated to take the property secured as collateral. What you didn’t know is that repossession may leave a dent on your credit finance history. However, the impact lessens over time such that your delinquency can be erased seven years after loan defaulting.
There are a few repossession strategies that your lender is likely to employ. They can repossess the asset with or without court notice, based on terms outlined on the collateral agreement. Technically, they can shift to gear as soon as you avoid making payment.
Borrowing without collateral
If you are not willing to pledge collateral, you may as well look for a lender that will render you cash based on your signature, or another person’s name. Options include online loans (the amount is limited), getting a co-guarantor to apply the loan for you or merely going for unsecured loans like credit cards.
Wrapping Up
Ultimately, acquiring a collateral loan is a brilliant idea if you are sure that you’re going to pay it back. However, it’s wise to avoid such kind of a loan if you’re already drowning in debt.