When you need to borrow money, getting a secured loan by putting down collateral could work better than relying on an unsecured loan, like a credit card. Secured loans can be easier to qualify for, but the biggest drawback is you could lose your collateral if you fail to pay the loan back. In this article, we’ll explain how loan collateral works and go over a few examples of secured loans to help you decide if you should use collateral to get a loan.
What is loan collateral?
Loan collateral is an item of value you put down to secure a loan. This collateral offsets the lender’s risk, since the lender can legally take possession of your collateral and sell it to recoup their losses if you can’t pay your debt back. Loans with collateral tend to offer lower rates, larger amounts, and, in some cases, are easier to qualify for.
Examples of secured loans
Many types of secured loans are used for major purchases, but there are smaller types of secured loans as well. Here are some examples of secured loans:
Mortgages let you purchase a home. With these loans, you’ll provide your home as collateral to secure the loan. As you pay down your mortgage loan, you gain more equity in the home, meaning less of the home’s value is used as collateral. Paying the loan off removes the home as collateral. If you default on a mortgage, the lender can seize the home through foreclosure.
2. Auto loans
Auto loans let you purchase a vehicle and use that vehicle as collateral to secure the loan. If you default on an auto loan, the lender might seize the vehicle through repossession if they can’t collect payment from you.
3. Title loans
Title loans use your car’s title as collateral to secure the loan if you own the vehicle outright. With these secured loans, the lender will appraise your vehicle and offer you a loan amount worth 25 to 50% of its value. Title loans often come with less strict credit score requirements, and you can continue driving your vehicle while the loan is outstanding.
4. Pawn shop loans
Pawn shop loans let you use any valuable item you own as collateral on a pawn shop loan. There are no credit checks with this type of loan. That means if you can’t pay back the funds, the pawn shop may take your item, but there is no credit damage.
The bottom line
If you’re buying a home or vehicle, you can get a secured loan in the form of a mortgage or auto loan. For other loan needs, the right option for you depends on your situation. Borrowers with poor credit or that want to save money on interest may want to consider a secured loan like a title loan or pawn shop loan. The collateral makes qualifying easier and offers larger loan amounts and lower rates. But keep in mind that the lender can repossess your item if you don’t pay back what you owe, so make sure you have a solid repayment plan in place before applying.
It’s smart to evaluate your specific financial situation when deciding whether a secured loan is right for you. Once you’ve done so, shop with several lenders to find rates and terms that work for your budget and needs.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.