What is Collateral Loans & How Do They Work?

First, let’s understand the term “collateral” – Collateral refers to any asset that the borrower deposits with the lender as a guarantee for obtaining a loan. Under the agreement of collateral loans, if the borrower is unable to repay the loan then the lender gets the possession of the deposited asset. Well, if you’re contemplating to avail a fast cash loan secured by a personal asset, it’s crucial to know how collateral loan works.

• Borrower deposits asset of value with the lender to secure a loan.
• This asset of value (deposited by the borrower) adds security for a lender.
• If a borrower defaults on their loan repayments, bank or other concerned lenders can sell off the asset (deposited by the borrower) to recover full or partial payment.

Collateral loans are also known as secured loans. Though each loan type has different requirements, most financial assets that can be grabbed and sold for cash are regarded as acceptable collateral. Car or other vehicles are used as collateral for a standard auto loan. In addition, valuable possessions like jewellery are accepted when availing high-value personal loans. To apply for loans, often small businesses put up their equipment or other assets as collateral. People with the history of poor credit or bankruptcy can increase their chances of availing a loan through depositing a collateral asset. As collateral loans are secured loans, they tend to have lower interest rates. Collateral exhibits a consumer’s pledge to repay the loan and lowers the risk of loss to the lender. Some collateral loan examples are explained below.

1. AUTO LOANS & MORTGAGES

Consumers commonly use auto loans and mortgages as their secured loan option. Here, the asset (i.e. car or house) is used as collateral for granting the loan. To determine the appropriate value of the collateral, most lenders require that assets be evaluated. Those who want to apply for a loan against mortgage need to be extremely cautious because lenders only approve home loans if the assessed value of the home meets or surpasses the sale price.

2. PERSONAL LOANS

Typically, consumers make use of personal loans to build credit, finance everyday expenses or consolidate existing debt. Lenders facilitate personal loans in two major types namely unsecured and secured. Unsecured loans aren’t supported by collateral whereas secured personal loans are supported by collateral. Secured collateral loans generally lower lender’s risk of defaults, so interest rates are lesser when compared to unsecured counterparts.

3. LOANS FOR SMALL BUSINESS

Typically, loans for small businesses are an accepted way to back a budding business and can be used to finance office space, equipment or hiring. Real estate or inventory can become collateral for this loan type. Owners of small businesses who run a business from their homes can make use of their personal assets as well to get approval for a loan. In certain cases, lenders need a personal guarantee like a written promise that the borrower’s personal assets can be held, if the company fails to repay the loan.

4. SHORT-TERM LOANS FROM THE PAWN SHOP/ PAWNBROKER

If you’re an individual or a small business owner, you can avail short-term cash loan from the pawn shop. Yes, this is a secured collateral loan type and it is easy and completely hassle-free. All that you need is your vehicle’s rego or ownership papers, your car keys, one valid photo identification and must be over eighteen years of age. Above all, even if you have a poor credit or are insolvent, you can still get bad credit loan against vehicle effortlessly. Moreover, you can claim your vehicle back after repaying the loan amount and interest. In the rare event where you’re unable to repay the loan amount, the pawn shop will sell off your vehicle to claim the loan amount, interest and make a bit of profit to survive in the trade.