Collateral is something that helps to secure a loan. When you borrow money, you agree (somewhere in the fine print) that your lender can take something and sell it to get your money back if you do not repay the loan. The guarantee makes it possible to get great loans and improves your chances of approval if you are having trouble getting a loan. When you promise collateral, the lender takes less risk, which means you have a better chance of getting a good rate. but is it a good or bad business /
How does a loan with property or car warranty work?
The collateral is usually necessary when the lender wants some assurance that he will not lose all the money. If you pledge an asset as collateral, the lender has the right to act (assuming you stop making loan payments): they take over the collateral, sell, and use the proceeds to pay off the loan.
This type and loan contrasts with an unsecured loan where all that a lender can do is reduce your credit score or take legal action against you.
Lenders prefer, above all, to recover the money. They do not want to take legal action against you, so they try to use collateral. They do not even want to deal with their warranties, but this is the easiest form of protection.
Types of credit with a guarantee
Any asset that your lender accepts as collateral can serve as collateral. In general, lenders prefer assets that are easy to evaluate and turn into cash. For example, money in a savings or investment account is great for collateral: lenders know how much it is worth and is easy to collect. Some common forms of warranty include:
Real estate (including equity in your home)
Machinery and equipment
Value and collectible items
Future customer payments (receivables)
Even if you are making a commercial loan, you can pledge your personal assets (such as your family home) as part of a personal guarantee. Please note that retirement accounts generally can not be used as collateral.
Valuing your assets to make a secured loan
In general, the lender will offer you less than the value of your promised good. Some assets can have huge discounts. For example, a lender may recognize 50% of your investment portfolio for a secured loan. That way, they increase your chances of getting all your money back if investments lose value.
When applying for a loan, lenders often cite an acceptable loan in relation to the value. For example, if you borrow with a property as collateral, lenders can afford a loan of up to 80%. If your home is worth $ 100,000, you can borrow up to $ 80,000. It is worth remembering that this type of guarantee may not apply if the property is your only property.
If your pledged assets lose value for any reason, you may have to pledge additional assets to keep a secured loan. In the same way, you are responsible for the total value of your loan, even if the bank takes your assets and sells them for less than the amount you owe. The bank may file a lawsuit against you to collect the unpaid amount.
Types of secured loans
You can find secured loans in various places. They are commonly used for commercial and personal loans. Many new companies, because they do not have a long history of profitable operations, are required to pledge collateral including personal items owned by business owners.
A home financed purchase is a type of secured loan: the home secures the loan, and the lender can close the mortgage if you do not pay. Even if you are lending for fixed amounts, lenders want to use your investment property as collateral. When hiring real estate loans, the type of loan available will depend on the age of the home, the foundation system and other factors. The same goes for cars and vehicles financed.
And loan with the dirty name?
There are also some secured loans for people with bad credit and bad name. These loans are often expensive and should only be used as a last resort. Be careful with these loans: if you fail to pay, the lender can take your asset and sell it. That way, you can end up with even more debt and without your assets. Without financial planning for your debts, it is not recommended to make a secured loan.
If you prefer not to pledge collateral, you will have to find a lender willing to transfer money based on your credit. Some of the options include:
Unsecured loans like personal loans and credit cards
Online loans are usually unsecured loans with good rates
Get a guarantor to apply for the loan with you
In some cases, such as buying a home, borrowing without using anything as collateral is probably not possible (unless you have a significant equity). In other situations it may be an option to make without collateral but you will have fewer options and you have to pay a higher rate for the loan.