People take out loans for several reasons. and whatever the reason might be, there are some lenders that require collateral before giving out a loan. If you intend to take out a secured personal loan, you will be asked to provide collateral. What, then, can you use as collateral for a personal loan? If you seek an answer to this, you are in the right place.
In this article, we will be providing examples of items and valuables individuals can use as collateral when taking out a personal loan, as well as other valuable information. Ensure you read to the very end, so you don’t miss out on valid information.
What is Collateral?
Simply put, collateral is an asset or item of value that can be used to secure a loan. Collaterals are used to reduce the risk for lenders. In a situation where a borrower is unable to repay the loan amount, the lender can seize the collateral and sell it to regain the loan amount.
For instance, if you put up your car or any other priced item when securing a personal loan and are unable to pay it back, the lender has the right to take ownership of the car.
Things You Should Know Before Signing a Loan Agreement
There are certain things you need to be aware of before taking out a loan, which would enable you to consider some factors that could have an impact on your ability to repay your loan. Here’s what you need to be aware of:
- What the APR of the loan is.
- The amount of money you are borrowing.
- The penalties attached to late payment or early payoff.
- How much the monthly pay is going to be like?
- What happens to your collateral if you are unable to repay your loan?
These are factors you need to consider before you sign any loan agreement. It would keep you on the safe side, knowing that you are aware of the terms and conditions specified by your lender.
What Can Be Used as Collateral for a Personal Loan?
If you are taking out a secured loan under a personal loan, you will be required to provide collateral. This is to check your capability of repaying our loan amount. Most lenders will ask the borrowers to put up an item of esteemed value or monetary account that would be used in a situation where the borrower fails to repay the loan.
Highlighted below are examples of what can be used as collateral for a personal loan:
- Vehicle
- Assets in the home
- Your Savings
- Boat
- Insurance policy
- Collectibles
- Bonds
- Future paychecks
- Precious metals
- Investment Accounts
- Art
- Jewelry
- Cash in a certificate of deposit (CD) account
- Antiques
- Stocks
It is important to note that some lenders can decide not to accept a vehicle that is five or seven years old as collateral. In essence, it is important to check what would be accepted as collateral from your lender.
Pros of Collateral on a Personal Loan
- You may get a lower interest rate.
- You may be able to borrow more.
- You can borrow with a lower credit score.
- It boosts your credit score.
- The interest on your loan can be used for certain purposes, such as business expenses, qualified higher education expenses, and taxable investments.
Cons of Collateral on a Personal Loan
- You risk losing your collateral if you are unable to pay back your loan.
- Most lenders give out loan amounts based on the value of our collateral.
Tips on How to Secure a Loan with Collateral
There are easy ways to secure loans with collateral. All you have to do is follow the steps outlined below:
- Provide valid documentation of the assets you intend to use as collateral. It could be in the form of a deed to your house, a certificate or document of ownership of your house, investment account statements, or an appraisal if you’re using valuables as collateral.
- Have a clear understanding of your lender’s loan term. Before signing a loan agreement, it is important to check the loan amount, interest rates, payment schedule, APR, and any other requirements specified by the lender.
- If there are questions you need clarity about, ask your lender. This would give you the opportunity to negotiate the loan term and interest rate, including the value of your assets.
- Don’t settle for less. The ideal thing to do is to compare multiple lenders to get the best rate and loan terms. The comparison of lenders not only enables you to weigh down your options but also enhances informed choices.
- Once you’ve finally decided on the lender to take out the loan from, sign a formal agreement and adhere to all the terms provided by the lender. In this loan agreement, you will be aware of how to make payments and how the transfer of ownership of your collateral would play out if you were unable to repay your loan.
In conclusion, before you sign any loan agreement, ensure you consult an expert who will evaluate your credit score and offer advice on how to go about your repayment and the type of collateral to use on your personal loan.
