Keep in mind that every lender is unique. One lender might accept one type of collateral for your loan while another lender doesn’t.
Collateral loans are also referred to as secured loans. When a borrower applies for a collateral loan, they agree to give up a specific asset in the event that they cannot repay the loan.
In the eyes of the lender, collateral loans are favourable because there’s less risk. Even if the borrower is unable to make payments, they have the collateral as back up.
The amount of your loan depends on the value of the collateral. In addition, a portion of the collateral’s value is usually considered for the loan, not the entire value. For example, if you have a car worth $5,000 being used as collateral, your loan might be approved for 60% of that value, or $3,000. This is to provide more protection to the lender.
What you use as collateral will determine the value. Generally speaking, collateral loans require more paperwork because the asset often needs to be appraised. For example, a car or an heirloom would need to be valued because an ordinary person wouldn’t know the exact worth. However, some assets are easy to value, such as saving or investment accounts. In this case, simply check the current balance.
Remember that a portion of the collateral’s value is accepted for the loan, usually between 50% and 90%. The exact percentage depends on the asset and lender.
No, collateral used for loans doesn’t have to be exactly equal to the borrowed amount. However, the collateral must exceed the loan amount value. If your collateral is worth less than the amount you want to borrow, you’ll have trouble getting approved.
LTV stands for loan-to-value ratio. This is a simple calculation that lenders use to calculate the percentage of your debt relative to the value of your assets. The ratio communicates how much of your assets you truly own versus the amount of debt outstanding against them. The more assets you fully own, the more favourable you are in the eyes of lenders.
In general, all lenders should accept some form of collateral. Collateral loans, or secured loans, are much safer for the lender so there’s little reason for them to reject collateral. With that being said, the type of collateral that’s accepted can vary from lender to lender.
There is usually more paperwork involved with secured personal loans compared to unsecured loans. Not only do you need to get the asset valued, you will be required to provide specific details and documentation related to the asset. This can make the application process longer as opposed to an unsecured loan.
When you use collateral, you run the risk of losing that asset if you default on the loan. Be sure that you’re willing to part with the collateral before using it to secure a loan.
Just like with unsecured personal loans, the lender will report your payment history to the two credit bureaus: Equifax and TransUnion. If you make any late payments or default on the loan, it will remain on your credit report for six or seven years from the date of the original missed payment. However, if the collateral tied to your secured personal loan is repossessed or confiscated, this will add even more negative marks to your credit history.
Not sure you want to put your house, car or grandmother’s silver on the line? Unsecured personal loans are actually more common than secured loans. The application process is nearly the same. The only difference is you don’t need to identify, value and provide additional documentation about collateral.
You can typically get an unsecured personal loan if you have:
There are a variety of options when it comes to taking out a personal loan, whether you decide to secure it with collateral or go with an unsecured loan. When looking into a secured loan, consider your ability to repay the loan very seriously before taking one out. Defaulting on a secured loan means more than just damaging your credit score – you could also lose the asset you put up for security.
If a secured loan doesn’t exactly fit your needs, you can consider unsecured loans that don’t require collateral.
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