What can be used as collateral for a personal loan?
10 AUGUST 2023
Several types of collateral can be used for a secured personal loan. Your options may include cash in a savings account, a car or a house.There are two types of loans you can obtain from banks or other financial institutions: secured loans and unsecured loans. Collateral is the pledge of something of value as security for the loan in the event of default on payment. Should you default on a secured loan, the lender may seize the asset you pledged as security. This increases the risk to you as a borrower while lowering the risk to the lender. Because of this, secured loans are generally more affordable and simpler to obtain approval for.
Not every lender requires collateral, in fact, most don’t. You can apply for a fast, flexible cash loan with RCS without putting any of your assets at risk.
Common Types of Collateral Loans
Also referred to as mortgages, home loans are among the most common kind of secured loans. The real estate you are funding serves as collateral. When a loan is in default due to missed payments, the lender may foreclose on the borrower's home and sell it to recover any financial losses.
If you take out a loan to pay for the purchase of a car, truck, boat, motorcycle, or even a private jet, the vehicle is used as collateral for the loan. Similar to a mortgage, the vehicle may be repossessed if the loan is not repaid. As with a mortgage this can be very negative for the lender, as the focus for the sale of the asset is often on speed, rather than attaining the best price.
What Counts As Collateral?
Collateral for secured loans can be almost anything of value, depending on the type. How quickly it can be turned into income is a crucial consideration. Lenders who specialise in business loans utilise shares, unit trusts, life insurance policies, cash in money-market funds, and savings accounts to reduce the risk. Lenders, who specialise in asset-based lending, have a positive view toward fine art, precious metals, some jewellery, and even luxury handbags. Particularly in less formal financial systems, an item can be used as collateral as long as it has a stable market value.
Pros and Cons
- Your chances of being accepted are higher. Securing a loan with collateral may assist in lowering your risk as a borrower if you're having trouble acquiring a loan, perhaps because of credit problems or a brief credit history.
- You could be eligible for a bigger loan. In a similar vein, by putting up collateral, you may be able to borrow more money than you would otherwise be able to because you are lowering the lender's risk.
- It provides liquidity for the near-term. A collateral based loan can help you access money if all of your funds are held in assets that are difficult to sell, like a home or valuables.
- If you default on a collateral loan, your largest risk is that you will lose the asset. Which is particularly concerning if you use a highly valuable item, like your home, to secure the loan.
- It calls on you to already possess a high value asset. You can borrow money with an unsecured loan without risking anything besides your credit score. It could be difficult to come up with the collateral required to attain a loan if you are not eligible for an unsecured loan.
Collateral loans carry some risk since if you default on payments, you could lose the asset that served as security for the loan. But if your finances are in order, a collateral loan can be well worth it. By enabling reduced interest rates and costs, securing a loan with collateral helps to balance some risk. In the long term, you may save a lot of money by doing that.
In short, a wide variety of assets can be used as collateral for a personal loan and the lender should discuss with you at length, not only what assets you possess which would qualify you for a loan through them, but also what you are comfortable putting up as collateral.