Collateral Loans – What are They?

Also called secured loans, collateral loans are a type of loan where you pledge your assets as collateral to secure a loan.  The creditor can take possession of the asset used as collateral and sell it to get his money back in the event that you default, or fail to pay back the loan. The collateral can be your house, car or any valuable assets you own.

In case that you are in dire need of securing a collateral loan but just don’t get the hang of it, we prepare for you this guide to show you a few tricks of the trade.

What types of collateral loans are there?

There are several collateral loans, depending on the asset you pledge to secure it.

Title loan is a type of collateral loan where your creditor takes out a lien against of your property. He is considered the legal owner of the property until you pay off the loan. This means the creditor is entitled to take possession of your property if you don’t pay back the loan in time. He is free to sell it if you are still unable to pay back after they take possession of your property.

Auto loan is the type when you take out a loan to buy a car. Once again, you have to make payments on time until you pay off the loan. Otherwise, you may lose it to your creditor.

You can take out home equity loan if you are denied other types of loans because of bad credit history. The amount of loan you can qualify for is based on the amount of equity you have built in your home.

What are the advantages of collateral loans?

The rule that opportunities go hand in hand with risks also applies to collateral loans.  While you may put your assets in stake by securing a collateral loan, you can still benefit from it.

Lower interest is the greatest incentive to drive borrowers to secure a collateral loan as well as the very first reason that promotes creditors to offer such a loan. A collateral loan dictates that the creditor can take over and sell the secured asset. They won’t suffer much loss even in the worst scenario when debtors default. As a result, they are willing to offer a collateral loan at a lower interest. Meanwhile, a lower interest means lower monthly and overall payments and less financial burden for the debtors. In a word, it’s a double-win, at least it seems so.

There is no fear of non payment of the loan lent in a collateral loan, after all it is your valuable property that has been pledged. Once the creditor has that apple in hand, he won’t be so cautious in approving loans of higher values. That is the time when you can draw as much of cash as you want, as long as he has your property.

That said, you may be tempted to borrow more than you can afford, or recklessly delay payments. Here are some words of advice: Borrow within your ability to pay and Always Repay the loan on time and as soon as you can.