What Is a Collateral Loan and How Does It Work?

If you’re browsing the internet looking for the right loan for you, chances are you have come across the term “collateral.” If you don’t know exactly what it means, have no fear.

In this article, we’re breaking down the word and its context and discussing various examples. By the end of this article, you will be well-versed in the subject of collateral as it applies to loans, so you can be confident as you go forward in choosing the best loan for you.

What Is a Collateral Loan?

To secure a loan, one must prove that they will be able to pay it back. Lenders only lend cash because they know they will get the money back eventually. Otherwise, loans wouldn’t exist. Often this proof of repayment comes in the form of income statements or employment details. 

Conversely, collateral loans provide the lender with an assurance of repayment through your assets. If you can’t pay your loan, the lender takes the asset you signed over as collateral. Collateral loans are often called secured loans, as the debt is guaranteed to be paid off through collateral.

The assets you use as collateral could be anything from your car to your house. This type of loan can benefit the borrower because it often leads to lower interest rates. Why? Because the lender is guaranteed repayment one way or another. It can also help borrowers with less-than-stellar records. For instance, those looking to borrow money who are unemployed or have poor credit ratings but do have assets.

Collateral loans are a good option for some and a bad option for others. Because repayment is guaranteed, collateral loans often help borrowers get better loan terms.

For instance, it could mean longer repayment timelines, more substantial loan amounts, and even lower interest rates. However, they will lose their assets if the borrower cannot repay the loan according to the lender’s terms. We recommend evaluating your situation closely before applying for a collateral loan.

How Does It Work?

As you may suspect, collateral loans often take longer than other types of loans. Why? Because the lender must evaluate the value of the borrower's assets.

For example, if you use a diamond ring as collateral, the lender must go through authentication processes. They will likely hire a third party to inspect the ring’s quality and condition, and the paperwork can be extensive. Additionally, they will do a fair amount of research to determine the ring's value and how much they could sell it for. 

With most collateral loans, the amount of money you are loaned will depend entirely upon the value of your collateral. This value will also help determine your loan's terms, such as its timeline, repayment terms, and interest rate. This figure is called the loan-to-value (LTV) and is the basis for evaluating collateral loans.

However, LTVs lay out the grounds for repayment as a percentage of how much your collateral covers the loan. With collateral loans, it is rare that the assets account for the entire repayment. For example, that diamond ring may be valued at a 60% LTV, meaning 40% of the loans must still be repaid in cash while the ring may cover the rest.  

What Can You Use as Collateral?

The next logical question you may have likely has to do with what you can use as collateral. The answer depends on the lender and their specific terms. However, most assets of value can be used for collateral loans.

• The most common assets used to back collateral loans are homes. Real estate is a secure investment and relatively easy to appraise, as most homes are evaluated frequently for insurance and tax purposes. A borrower can use their home or other real estate assets as collateral to secure their loan. As the value of the real estate is much higher than most other assets, it also enables borrowers to receive larger loan amounts on better terms than other assets used for collateral loans. 
• Vehicles are another frequently used asset when it comes to collateral loans. For instance, title loans allow a borrower to use their car as collateral and continue using it while the loan is being paid back. The amount of money you receive depends on your car's condition, model, and age. 
• Jewelry is also often used to secure collateral loans. Jewelry can be quickly evaluated and authenticated. It can also fetch significant loans depending on its rarity, antiquity, and purity. Many people use their jewelry for collateral loans if they are strapped for cash. 
• The final asset we will discuss that is commonly used as collateral for a loan is one’s investment portfolio. Depending on the investments and the market, this can work to both the lender's and borrower’s advantage. Investment portfolios are volatile due to the nature of the market; however, if cashed in at the right moment, it could pay the lender far more than the principal amount they had loaned. 

In addition to these assets, many people also use the following to secure their collateral loans:

• Art
• Collectibles
• Boats
• Antiques
• Insurance Policy
• Future Paychecks

There are several other possible items used for collateral loans. Essentially, the value of your asset determines the loan.

Where Can I Find Collateral Loans?

Collateral loans are universal. You can secure them at your usual bank or banking institution. And you may also find them at credit unions. However, they are frequently advertised by online lenders and storefront pawn shops.

These institutions differ, however, in the terms and type of collateral you can use. The interest rates will vary, and the appraisal of your assets may be more accurate at some than others. We recommend using discretion if applying for a collateral loan. 

Pros and Cons of Collateral Loans

There are upsides and downsides when it comes to collateral loans. Let’s explore them. 

Pros:

• Can get you better loans terms
• Can secure more money
• You can get a loan with bad credit
• You don’t necessarily need to be employed
• Can help you build credit

Cons:

• You can lose your home if you default
• You can lose your cherished possessions if you default

What if You Don’t Have Collateral?

Collateral loans depend on collateral, so not having collateral means you cannot secure one. However, there are various other loans one can apply for without collateral, such as Simple Fast Loans. 

Do Simple Fast Loans Require Collateral?

Simple Fast Loans offers loans without collateral. We understand that you may not have many assets to use against your loans or may not be interested in collateral loans. That’s why we offer quick, hassle-free loans so you can quickly get the money you need.

Collateral loans work for many people, but they don’t work for everyone. The process of having your assets evaluated can take lots of time. And at Simple Fast Loans, we understand that when emergency expenses pop up, you may not have the luxury of time. So, we’ve created a straightforward application process and an almost immediate loan decision-making time. 

Our loan amounts range from $200 US to $3,000 and are intended for unexpected costs such as emergency travel, medical bills, and home repairs. We don’t require collateral and offer flexible, easy repayment periods, so you can don’t have to add the additional stress of paying off your loan to the stress you already have from your emergency expense. Best of all, you can get your approval that same day and the money in your bank account the next. 

With Simple Fast Loans, you benefit from:

• Simple Verification Process
• Instant Loan Decisions
• Quick cash

Our terms aren’t dependent on the assets you may or may not have; you can apply with any credit. We offer an installment loan that fits well for you and your situation.

Final Thoughts

Collateral loans work for many people. If you need cash and have an asset of value, a collateral loan could help you pay for what you need to pay for when you need to pay for it.  However, they don’t work for everyone.

Perhaps you don’t have the time to evaluate your assets because an emergency expense has come up, and you need to pay for it immediately. Or you don’t have the assets to back the loan you require. Or maybe you don’t feel comfortable signing away your home or vehicle if you can’t make your loan payments on time. If the latter is you, then consider one of the loans we offer at Simple Fast Loans. We understand that life is complicated, but your loan doesn’t need to be.