Putting up a valuable property as collateral may seem as an unappealing option, especially if you’re already in a financial rut. If you experienced losses, why would you put an asset on the line and risk losing it too, right? It’s as if it’s a looming punishment in case you fail to pay the loan back. However, taking a collateral loan is not as bad as you think and it can be actually helpful in attaining your financial goals and needs.
How Collateral Loans Work
A collateral loan means pledging a valuable property or asset to the lender in order to secure credit. When the loan defaults, the lender takes full ownership over the property. Lenders typically sell the collateral in order to recover from their losses from an unpaid loan. On the other hand, the collateral is returned to the borrower when the loan is fully settled on or before the due date.
Commonly, houses and cars are used as collaterals, but it’s not limited to that. Valuable assets such as jewelry, artwork, antiques, and equipment can also be accepted as collaterals depending on the lender whom you’re borrowing money from.
How It Benefits You
Here are five ways a collateral loan can work in your favor.
1. It motivates you.
Because a collateral is a valuable property, you would want to get it back. Therefore, you will be driven to use the loan amount wisely, work hard, get rid off the debt, and regain full ownership over your asset. It’s a win-win situation, right? Not only will you get the collateral back, you will also be closer to attaining a business goal or reducing debt.
“Collateral reduces the cost of borrowing because it gives the borrower incentives to work hard, but it also increases the cost of borrowing because the collateral may be worth more to the borrower than to the lender and because transferring control imposes costs,” according to Yaron Leitner, a senior economist in the Research Department of Philadelphia Federal Reserve Bank.
2. It has a lower interest rate.
Collateral loans have lower interest rates because it provides a higher level of security to the lender.
In a collateral loan, the lender assumes a lesser risk as opposed to granting other types of loans. In case the loan defaults, the borrower’s property serves as a ready alternative to get the money back. Because of the added security and assurance of recovering the loan amount regardless of what happens, most lenders offer low interest rates on collateral loans.
3. It gives you access to more money.
A collateral loan typically doesn’t have a limit, because the amount you get will be based on the value of your collateral. This means that you can potentially receive a higher amount from this loan than others.
4. It is less strict in terms of credit score.
A poor credit score poses little to no implication over your eligibility for a collateral loan. You may have records of unpaid bills, loans that defaulted, or you may be blacklisted, but all of that will matter little or not at all.
Depending on the lender, a credit score check may or may not be required. If it is, lenders are typically less stringent if you’re trying to get a collateral loan. Because they have something to fall back on in case the loan defaults, they tend to care very little about your credit score.
5. It doesn’t look at your employment status.
A financial setback may come from losing a job. If you’re facing such predicament, you need something to help you get back on track. A collateral loan can aid you with that because you don’t need to be employed to qualify for it. As long as you own something that can be used as a collateral, the loan can be easily granted to you.
A collateral loan can help you address your financial concerns through a less complicated process and a more manageable risk. If you need a financial boost and have an asset that can be used as collateral, look into taking this loan and see how it can work in your favor.
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