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What Is A Collateral Loan?

Posted by Chuck Paulsen on Sunday, March 03, 2013 - No Comments

When you need to take out a loan of any kind, then learning about the different forms which loans can take can be essential. One of the most important types of loan is the collateral loan, which allows you to take out money as long as it is secured by an asset, such as a home or car. If you cannot repay the loan, then the collateral is taken in place of the debt. Collateral loans are often popular because they are cheaper and less risky than other types of loan, and you are more likely to be accepted if you own a valuable item.

Borrowing against an object or assets means that you pledge to pay the debt, or have the assets taken away in exchange. There are a range of different types of loan collateral, and what you choose to pledge will depend very much upon how much money you want to take out, and how much you need that loan. Deciding what to pledge as an asset is also commonly not the decision of the property holder, but is often chosen by the lending party. This means that you need to know exactly what you are risking before you sign any agreement.

What Can Be Used For Collateral?

The collateral for the loan is most often seen in examples such as home mortgages, or property exchange. In these circumstances, the real estate which is being acquired will be held as collateral while the debt is being repaid. This means that the lender will hold the deed, or any other documentation, until the debt is completely cleared, or the debtor can no longer pay off the interest, and is forced to settle up by handing over the collateral. The house or land remains with the bank, or lending company, until every single part of the debt is repaid, and only then will the purchaser come into full position of the real estate.

In a similar fashion, many banks will offer to provide borrowers with the money to purchase a car. In this case, the car itself is the collateral, and will be held by the lender in the same way as a piece of real estate. The lender has the right, whenever they choose, to sell the vehicle. Because these companies want to get as much as possible when they take collateral, they will usually only lend a sum which is equal to the total amount of the vehicle, and so you cannot get a large loan on an older car.

There are also a range of other assets which will be taken up by the lender in order to secure the loan. This can range from any asset which is worth more than the loan, and can include computers, laptops and smartphones. They will also take other property, such as antiques or jewellery which is then held as collateral until the loan is repaid. In these cases, it is likely that the loan will be worth less than when banks accept cars or homes as collateral.

If you want to take out a collateral loan, then you can offer the lender whatever you feel comfortable with, from property to financial assets or even gadgets. All that you need to do is ensure that your property is still worth as much, or more, than the value of the loan. If this is not the case, then the bank may refuse the collateral and use other forms of asset in order to make certain that you pay the loan. Only when both sides agree on the value of the asset, and its use as a saleable item, is it possible to arrange a collateral loan.

The Property Is Still Owned By You

When you have signed up for this agreement, you do not need to worry about handing over the property itself to the lender. Just like with a mortgage, were the bank really owns the home but you pay off the debt in monthly installments, you can still use the property until the debt is repaid. The only way in which you would be limited from using this item is the asset will be devalued through use. In these circumstances, you are unlikely to be able to use the asset as you please.

Collateral loans are designed to give more protection for the lender, and in this way can be an easy and fast method of getting the money you need, now. However, handing over assets could mean that if your repayments do not continue, then you lose that collateral.

 

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