All You Need to Know About Collateral Loans
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Collateral: Definition, Types & Examples
Collateral loans are used by many financial service providers. When you take out a collateral loan, you are giving a lender the right to take the property that is securing the loan if you fail to meet their repayment schedule (i.e. if you miss loan repayments). Common collateral loans include mortgages (using a home as collateral) or auto loans (using a car as collateral).
Collateral loans are also commonly used by pawnbrokers. In essence, clients pledge a valuable piece of property, such as gold or jewelry, and in return pawnbrokers will lend them money. When the loan is repaid, the client’s merchandise is returned. Unlike with other loans, there is no credit consequence to the borrower if they elect not to repay the loan and retrieve their collateral. In that event, the items are sold by the pawnbroker at a value price to retail customers. As a financial institution, a pawnbroker is subject to the same federal laws that other financial institutions, such as banks, are required to abide by. There are severe penalties for institutions that act outside of the regulations detailed in:
Pros and Cons of Collateral Loans
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Pawnbrokers typically offer collateral loans at low interest rates, specializing in short-term small loans. This is because there is much lower risk for the lender thanks to the personally-owned property presented as collateral. Secured short-term loans from pawnbrokers benefit from being regulated by the government, with all the terms of business clearly stated in the contract. The pawn industry offers secured personal loan options for people that don’t qualify for loans from their banks or credit unions.
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For similar reasons, when you have a bad credit history, collateral loans are easier to obtain than unsecured personal loans.
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As lenders view collateral loans as less risky than unsecured loans, lenders are more willing to charge a lower APR. That means you can get a better deal.
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A collateral loan gives you the option of borrowing more money than lenders might otherwise be interested in lending to you. This is most obvious when considering mortgages, but may be beneficial when dealing with pawnbrokers too.
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Secured loans are useful tools for establishing a credit profile. Making regular, timely payments to a lender that reports to consumer credit bureaus will establish that you are a responsible borrower, which will likely come in useful when you make future loan applications.
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However, there are potential downsides to collateral loans. Valuation of the assets used to secure the loan (when they are not things with an obvious dollar value such as saving accounts) can take time, that may vary from lender to lender. That’s why we at VerdeLoans distinguish ourselves with our system of collecting and negotiating an appropriate value for a potential borrower’s item, so that the process is low-stress and involves no footwork on the borrower’s part.
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The other major downside of collateral loans is the risk that the borrower takes on. If the borrower falls behind in payments, it is possible to have the collateral asset be repossessed. You could lose your account, your car, even your house.
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Can I Get a Loan with Bad Credit If I Have Collateral?
As mentioned prior, lenders who specialize in collateral loans do care less about bad credit reports. However, depending on factors such as loan term and the type of loan, bad credit may have a larger impact on your ability to secure financing. Home equity loans, and anything to do with real estate, can be tricky to secure if you have lower credit scores. In these cases, you may have to put more time into repairing your credit score by taking out smaller collateral loans and making monthly payments, getting a credit card when it becomes possible, reducing your debt burden. VerdeLoans offers collateral loans from as little as $5 to as much as $500,000.