What is Collateral and How Does It Impact Getting a Loan
26/10/2022
2 minute read
What Is Collateral and How Does It Impact Getting a Loan?
Like most people, you’ll need to consider financing options if you’re going to make a large purchase. Personal loans are one way to get the funds, but qualification requirements can differ from lender to lender. One important thing to consider is whether a loan requires collateral.
You may have heard of collateral, but what does it mean when it comes to taking out a loan? Collateral is an asset, such as a house or car, that can be seized by the lender if a loan is not repaid. These types of personal loans are called secured loans because you are securing — or protecting — the loan with something of value, thereby reducing the lender’s risk in loaning you money. Once the loan is repaid, your collateral is no longer on the line.
Examples of collateral may include:
• Property (real estate)
• Cars/other vehicles
• Equipment/machinery
• Insurance policies
• Deposits
• Cash accounts
• Other valuables or collectible items
Loans that require collateral (secured loans)
The following are common types of loans that must be secured with collateral. For some, the required collateral is the item or property itself; for others, the collateral is a different asset.
• Mortgages — your house is the collateral and can be foreclosed on if you don’t repay the loan.
• Home equity line of credit (HELOC) — you can use the value of your home like a line of credit, with the home backing the loan.
• Auto loans — your vehicle is used to help you get a loan to buy a car or other vehicle and can be claimed by the lender if you default.
• Land loan — this allows you to get funds to buy land, and that land functions as the collateral.
• Business loan — to secure a business loan to buy equipment, pay wages or make investments, you can offer inventory, land, or other property.
Considering a secured loan?
Advantages: It’s easier to qualify for secured loans because they are considered less risky to the lender. Though lenders offering secured loans still consider credit history when making approval decisions, loans that require collateral could make borrowing more accessible to those with less-than-perfect credit or thin credit history. They also tend to have lower interest rates and longer terms, which could make repayment easier.
Disadvantages: You must have an asset to back the loan and may encounter lower borrowing limits. But the biggest downside is that you stand to lose your property if you can’t repay the loan in full. If you miss multiple payments, the lender may repossess the collateral you put down for the loan. And if that asset’s value is not high enough, you could end up paying the difference.
If you’re thinking about applying for a secured loan, be sure to research different lenders and understand the terms before you commit. And there are other things to consider, including your credit score and what kinds of assets you have to offer (as well as their value).
Wondering which type of loan is right for you? Talk to a Lendmark loan specialist at a branch near you, or get started online. We can help you find the funding you need with fixed, affordable payments.
