A collateral loan gives you the chance to secure a loan even with bad or no credit. It is a solution to help you get your finances back on track if you encounter an unexpected event that puts you in dire need. Having a poor credit score disqualifies you from most loans. Lenders examine this score to determine if you’re trustworthy with money.
It can be difficult as past events can affect your credit score for years. Even over a mistake, a missed payment or foreclosure can lead to a drastic change in the lender’s behavior. It can also be because of bad financial habits that are no longer with you.
The good news is that collateral loans don’t consider the past. By having collateral, you can secure a loan without worry about your score.
What Are Collateral Loans?
As the name implies, a collateral loan means you offer something of value to secure the transaction. You use this item as collateral, guaranteeing that you’ll eventually pay the loan back. If you cannot pay the loan, the lender keeps the collateral to sell to get their money back. Collateral works because it shows your commitment to paying off the loan.
There are several types of collateral loans on the market. Most people don’t know that they enter into collateral loans because there is no formal title attached. Here are the most popular:
- Car title or registration loan: You are using your car as collateral for the loan.
- Home mortgage: A home mortgage means you have the property as collateral until you pay the loan. You lose the house if you don’t pay the mortgage off.
- Money as collateral: These loans occur all the time in stock trading and the like. You are using the money you deposited in your brokerage account as collateral to use more money for trading. Some banks also offer credit cards in exchange for collateral to those who have no credit scores.
How Do Collateral Loans Work
People often use their car titles for collateral loans. To gain this type of loan, you have to estimate the car title’s value. This allows lenders to see how much they’re willing to lend you for the loan. Usually, it’s an amount near or equal to your car’s value.
To show your commitment, you have to leave your car’s title with them. They’ll only give it back to you once you have paid the loan in full. The good news is that you still keep the car. You can drive it and use it as you would. The lender only claims the car if you are unable to fulfill the loan’s terms. (1)
The Collateral Loan Rates and Application Process
Application for a collateral loan is a faster process compared to a traditional one. You can apply online, and there are two requirements:
- Your personal information
- The item offered as collateral
Your personal information contains income, address, contact details, and other relevant details. You’ll also add information, depending on what your collateral is. For example, if you are using a car as collateral, you have to provide the manufacturing year, mileage, make, and model. You’ll also need the document of the car’s estimated value ready.
After submitting all the requirements, you wait a few days before getting the money. The process is faster as there will be no background or credit checks. The collateral will act as the leverage needed to accept the loan. Once you get approval, you’ll receive a document with the estimate of the loan.
The document will also tell you what documents you need to submit before claiming the money. It will also contain information about the payment terms and interest rate. It is usually the title or registration of the vehicle that the lender requires. You then go to the lender, provide the documents, and get the money.
Is a Collateral Loan Worth It?
A collateral loan is a way to get around the normal process of credit checks for traditional loans. Since it is faster, you can get the money you need without going through a tedious process. However, you are putting a precious item at risk by handling a collateral loan. Make sure you have the means to pay off the loan. Without it, you might lose your home or car.
Collateral loans are a good option for lenders because it minimizes risk. You may want to consider this option since they generally have lower interest rates than unsecured loans. Like any loan, you should only do it if there is an important reason to get into debt.