If that sounds somehow harsh or unfair, keep in mind that without collateral loans, most of us would never be able to afford those sorts of big ticket items. Our home buying options<\/a>, for example, would be to save up until we had enough to pay cash, or live with our parents until they passed on and left us their house. Personally, I don\u2019t find either of those particularly promising.<\/p>\n Thanks to the modern mortgage structure, however, almost anyone can finance their home over a 15 or 30-year period. Lenders still care about your credit history<\/strong> and such, but they have the home itself as collateral as well, which allows the sorts of ridiculously low interest rates we\u2019re currently experiencing in home loans.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662563317738{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n Before we push ahead with different situations in which collateral loans might be a good option, it might be helpful to clarify a few of the terms<\/strong> I\u2019m going to use or which you\u2019re likely to encounter if you\u2019re researching collateral loans for your own use.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662563533057{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n As you\u2019ve no doubt picked up on by now, \u201ccollateral\u201d refers to the home, car, or another item of value you offer as security for a loan<\/strong>. When you use your property or assets this way, they become \u201ccollateralized.\u201d The term \u201ccollateralization\u201d can be used in reference to the process itself or in reference to the loan or the items offered up as security.<\/p>\n You will thus hear that the loan has been \u201ccollateralized\u201d or remember that you can\u2019t sell your truck because it\u2019s \u201ccollateralized\u201d for a small personal loan on which you\u2019re still paying. You may also come across a reference to the \u201ccollateral value\u201d<\/strong> of your property, referring to the amount it\u2019s worth as collateral. This may be different than what you paid for it or how much it\u2019s worth to you personally.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662563540165{margin-top: -0.7em !important;}”][vc_column_text]<\/p>\n If your loan is backed up by collateral, it\u2019s a \u201csecured loan.\u201d The term references the lower risk taken by the lender when an item of value is being offered as \u201csecurity”<\/strong>.\u00a0If you don\u2019t make your payments, they take ownership of your collateral and sell it to recoup their losses. That\u2019s not really what lenders want to do; they\u2019re not looking to make a living selling used boats or whatever. What this does, however, is enable lenders to offer loans they might not otherwise<\/strong>, based on your credit score or credit history, and to extend better terms than they would even if they did approve the loan minus your collateral.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][vc_video link=”https:\/\/www.youtube.com\/watch?v=lwTqe2UzJ5c”][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662563628997{margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n If your loan is NOT backed up by collateral<\/strong>, it\u2019s an \u201cunsecured loan.\u201d These rely entirely on your creditworthiness as indicated by your credit history and current credit score. Lenders may, to a lesser extent, factor in your current reliable income and job situation.<\/p>\n Failure to make your payments on time, or to make them at all, will hurt your credit (making it even harder to borrow money on decent terms in the future) and may lead to collections or legal action, but it WON\u2019T directly result in losing your home or car<\/strong> because those things haven\u2019t been offered up as collateral. Because this means greater risk to the lender, expect lower loan limits and higher interest rates on most unsecured loans.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662563827731{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n Your \u201cassets\u201d are anything you own that has financial value<\/strong> and are thus might be used as collateral. Some assets, like your home or car (assuming you have enough \u201cequity\u201d in them \u2013 that you\u2019ve paid enough on THEIR loans that you \u201cown\u201d part of their value) are fairly typical as collateral. They\u2019re easily converted into cash if necessary and have a fairly predictable value.<\/p>\n Savings accounts or investments are also “assets”<\/strong>.\u00a0Their value to lenders depends on how \u201cliquid\u201d they are<\/strong> (how easily they can be transferred and converted into cash) and the likelihood they\u2019ll hold their value over the life of your \u201csecured\u201d loan.<\/p>\n Atypical assets<\/strong> \u2013 your semi-rare comic book collection, those sacred mummy heads you inherited and are currently on loan to the local museum, that one-of-a-kind triple-neck 8-string guitar designed, built, and signed by Rick Nielsen of Cheap Trick \u2013 may be more difficult to use as collateral<\/strong> since their value is slightly more subjective and they\u2019d be more difficult to convert to cash.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662564292981{margin-top: -0.7em !important;}”][vc_column_text]<\/p>\n This is the \u201cstored value\u201d<\/strong> you own in various forms. If you\u2019re halfway through paying off your car, and its current value is $12,000, you have around $6,000 worth equity in it. The same holds true for your home. If its market value is currently $195,000 and you owe $115,000, you have equity of about $80,000 to work with (although most lenders won\u2019t advance more than 80% of the value of whatever you\u2019re collateralizing). Savings accounts or investments are a bit easier to compute. If you have $7,341 dollars in savings, that\u2019s equity worth $7,341.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][vc_raw_html]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[\/vc_raw_html][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662632689988{margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n You\u2019re no doubt aware that liquids easily change form to adapt to circumstances. Pour your drink into a tall, thin glass, and your drink fills up the tall, thin shape. Spill it on your keyboard, and it quickly fills in every crevice and finds its way into the inner workings of your computer. \u201cLiquid Assets\u201d are those easily converted into cash. \u201cLiquidity\u201d refers to how easy (or not) this conversion is<\/strong>. Used cars in good shape have great liquidity; rare books in ancient languages may be just as valuable, technically, but are harder to immediately turn into cash.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662633060810{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n Interest is the primary cost of a loan. Figured as a percentage of the total borrowed. Interest rates tend to be higher if you have a limited credit history or a low credit score<\/strong>. Because the lender is assuming a greater risk by loaning you money and hoping you\u2019ll repay. Greater risk means greater reward, at least in modern American capitalism. Interest rates are typically lower if you have a good credit score because the risk is less. The same is true if you\u2019re able to offer up collateral of greater value than the loan amount. The same rate of interest can be computed in numerous ways (which we won\u2019t go into here). So it\u2019s important to pay attention to the details when rate shopping for your best loan options<\/a>.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662633866327{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n \u201cDefault\u201d is a fancy word for \u201cstopped paying\u201d and \u201crecourse\u201d is a fancy word for what the lender has a right to do if you stop paying. If you still owe money on a loan and you stop paying for any reason, you\u2019ll eventually be declared \u201cin default\u201d<\/strong>. Whether this is triggered at 30 days, 60 days, or longer, and what penalties are triggered once you\u2019ve \u201cdefaulted\u201d varies from loan to loan. This is the point, however, at which lenders can report you to a collection agency, take legal action, or seize control of whatever assets you collateralized to secure the loan.<\/p>\n So, to summarize, the reason you may be asked to offer part of your assets as collateral is so that the lender has recourse if you default<\/strong>. You agree because you wanted to secure a lower interest rate than you could get with an unsecured loan. And you know you have sufficient equity for adequate collateralization. (See how much fancier that sounds than \u201cI had to sign a paper saying the bank will take my truck if I don\u2019t make my loan payments\u201d?)[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662634361687{margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n There are a wide variety of collateral loans, each with its own features and potential pitfalls.<\/p>\n In general, however, there are a number of positives to collateralizing your assets<\/strong> in order to get the best terms on a secured loan. (I thought we might get more comfortable with all the fancy terms if we used them more.) What I\u2019m saying is, there are reasons you might want to explore collateral loans for whatever your current needs might be.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662634740655{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n If you have limited or poor credit, offering collateral might make the difference between getting a loan and being denied<\/strong>. Lenders have to make a reasonable profit \u2013 that\u2019s how business works. In their case, that means two primary things have to happen with some regularity. First, they have to loan out money at interest (with interest being their profit), and second, they have to get repaid with a minimum of extra effort. If it costs them twice what they\u2019re making in interest to track you down and force you to pay, the lender loses money in addition to your credit being damaged. That\u2019s no fun for anyone. With collateral, there\u2019s a better chance you\u2019ll pay, and better protection for the lender if you don\u2019t.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662634765023{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n Offering collateral can secure you a better interest rate. This works for the same reasons we just discussed a loan approval. Lower risk means lenders can offer better terms<\/strong> \u2013 especially a lower interest rate. They don\u2019t have to make a LOT on each loan if they\u2019re relatively sure of repayment. Plus, lenders want you to be happy and say nice things about them. And come back to them for your future financial needs as well. Reputable lenders aren\u2019t looking to \u201cdefeat\u201d you; they want you both to come out OK on the other end because that\u2019s what\u2019s best for business.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][vc_column_text]<\/p>\n You may be able to borrow a larger amount if you have sufficient collateral. Let\u2019s say you\u2019re planning some major home renovation and remodeling. You\u2019ve run the numbers, and it\u2019s the best thing for your family now and the value of your home in the coming years. But the estimates you\u2019ve gathered for getting the work done are higher than you\u2019d hoped, and your credit is OK, but not great. Being able to use your home\u2019s equity as collateral gives lenders the security they need to extend you the full amount<\/strong>. The risk is less for them but greater for you\u2026 if for some reason you\u2019re unable to make your payments in the future, you could lose your nicely remodeled and renovated home.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][vc_single_image image=”11735″ img_size=”full”][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662635214624{margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n If your wealth is largely tied up on assets with low liquidity<\/strong>, it might make more sense to borrow against them than to convert them in order to finance whatever you need to do. This is more often the case with businesses than with personal collateral loans.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662635276263{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n One of the realities of modern American life is that almost all of us need access to financing multiple times over the years<\/strong>. At some point, you\u2019re going to want to buy a home, finance a car or truck, pay for a wedding, take a vacation, pay off medical bills, or start a small business. Each time you do, potential lenders will check your credit<\/a>. The higher it is, the more flexibility you\u2019ll have and the better the terms you\u2019re likely to be offered<\/strong>. The lower it is, the more difficult it is to do, well\u2026 pretty much everything.<\/p>\n Collateral loans are also a good way to finance debt consolidation. If you\u2019re ready to get serious about your household budget and take more effective control of your personal finances, collateral loans can act as a foundation for making that happen.<\/p>\n You are not your credit score.<\/em> It\u2019s not a reflection on you as a person. It is seriously inconvenient, however, and expensive over time. A few small collateral loans allow you to obtain credit<\/strong>. But just as importantly, as you pay them back, you\u2019re building your credit history and raising your credit score. So that\u2019s pretty awesome.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662803874783{margin-top: -0.7em !important;margin-bottom: -1.2em !important;}”][vc_column_text]<\/p>\n Well, there\u2019s the biggie <\/em>\u2013 if for any reason you\u2019re unable to repay the loan in full, you can lose whatever you\u2019ve put up as collateral<\/strong>. Even if the lender takes your collateral and sells it to recoup their investment, late or unpaid loans will still damage your credit substantially. As with ANY loan in ANY form for ANY reason, make sure you have a budget<\/strong>. And a good reason to borrow and a clear pathway to repayment before you even begin rate shopping.<\/p>\n There are a few minor inconveniences as well. Obviously you have to have an asset or assets of value<\/strong> in order to offer them up as security. There\u2019s more paperwork than with an unsecured loan<\/strong>. Because lenders will require a formal valuation of the assets<\/a> you\u2019re offering as collateral. That means it may take a bit longer to get your loan as well.[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column css=”.vc_custom_1662803749849{margin-top: -0.7em !important;}”][vc_column_text]<\/p>\n We\u2019re never going to tell you what the best choice for you or your family is when it\u2019s time to borrow or refinance. What we will do is try to give you all of the information necessary for you to make an informed decision.<\/p>\n It probably won\u2019t surprise you to know that we\u2019re big fans of online lending around here. We don\u2019t loan money ourselves, but we maintain a curated database of reputable online lenders who specialize in creative solutions and surprisingly competitive terms. And many of them, as it turns out, aren\u2019t as quick to request collateral as traditional financial institutions. I\u2019m not saying it never happens \u2013 just that you\u2019d be surprised at the options you might have.<\/p>\n If you\u2019re looking to borrow or refinance, consider all of your options before making your final decision. Collateral loans are ONE of those options, but they\u2019re probably not the ONLY one.<\/p>\nLet\u2019s Talk Terms (The Terminology of Collateral Loans)<\/h3>\n
Collateral \/ Collateralization<\/h4>\n
Secured Loans \/ Security<\/h4>\n
Unsecured Loans<\/h4>\n
Assets<\/h4>\n
Equity<\/h4>\n
Liquidity<\/h4>\n
Interest<\/h4>\n
Default \/ Recourse<\/h4>\n
Advantages of Collateral Loans<\/h2>\n
Available for Poor Credit<\/h3>\n
Lower Interest Rate<\/h3>\n
Your Collateral Allows You to Take a Higher Amount<\/h3>\n
Collateral Loans Provide \u201cliquidity\u201d<\/h3>\n
Collateral Loans are a Great Way to Build Credit<\/strong><\/h3>\n
Potential Pitfalls of Collateral Loans<\/h2>\n
Final Thoughts<\/h3>\n
![\"Loanry\"](\"https:\/\/www.loanry.com\/blog\/wp-content\/uploads\/2022\/02\/loanry-big-banner.jpg\")
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