Whenever I hear the word Collateral, various images of Tom Cruise starrer movie come to my mind. You have seen that movie, right? Even if you haven’t seen that movie, I will just quickly establish the connection between the essence of that movie and how the collateral works in the real world.
In the movie, Tom Cruise had abducted (sort of) Taxi driver’s girlfriend and he put up a condition that he won’t let her free until the Taxi driver drove him to various places all through the night so that he could assassin people on his list.
The taxi driver had to submit to the coercion of Tom Cruise lest he would have killed his girlfriend. It was as if a precious thing of the taxi driver was kept as a security (unwillingly though) and the Taxi driver had to submit to the diktats of Mr. Cruise or else he would never ever get to see his girlfriend.
What is a collateral loan? In the real world, Collateral means something kept as a security with the banks against the loan amount borrowed. Non-performance of the contract, failure to pay to be precise, means the seizure of the collateral.
Such type of loans are also called secured loans and are easy to get because the lenders have a sort of indemnity that they can sell the asset and realize the collateral’s value.
Examples of secured loans include mortgages or auto loans, where your home or car serves as the collateral. You can also get a secured personal loan, which can be used for a variety of reasons, such as paying for a big-ticket item or consolidating credit card debt.
For instance, Mortgages are secured loans where the house serves as the collateral. There are many secured personal loans available in the market, typically which are concerned with credit card debt consolidation.
What can serve as Collateral?
- Item kept in the custody of the lender as a backup in case of default
- Item of equal value of the loan amount sworn in by the borrower
- The item which is subjected to seizure in case of failure to play and whose ownership changes hands in case of non-performance of the contract
Broadly, most financial assets which can be liquated at the go are accepted as Collateral. However various types of loans have various prerequisites in the form of Collateral. Personal loan with collateral: In high-value personal loans, possessions such as jewelry and ancient artifacts are accepted as collateral.
In the case of manufacturing units, machinery is counted as collateral and in terms of businesses; bonds serve as collateral (more often than not).
Collateral often serves as the lender of the last to people with low credit score because it exhibits the consumer’s determination to pay back the loan.
Sometimes, only sometimes, collateral also translates to getting cheaper loans and no direct correlation can be established because factors such as payment history, bankruptcy etc are also calculated.
Pros and Cons of a Secured Loan
- Higher chances of getting a loan because even in case of default, the lender is at a win-win situation
- Your chances of getting a higher amount increase manifold because of mitigated risk
- It gives instant liquidity if all your money is frozen in the assets
- It can also translate to lower interest rates
- You can lose the collateral altogether and for good
- You have got to have a highly-priced possession which will be undervalued in the loan process
- Tethering in the middle would mean the loss of loan amount paid so far besides the gigantic loss of the collateral
Why some Lenders need Collateral?
Lenders want to be financially secure when they are lending you money without securing anything in return, there is a lot risk involved. In order to mitigate this, risk lenders soak in collaterals.
In particular, business loan providers who got to have something in their arsenal should your boat get caught in shallow waters.
If your small business hasn’t made its presence count, then it could be hard for lenders to establish trust and assume that you would be paying back the loan in time. Pledging an asset which is equivalent to the cost of that loan curbs the risk for lenders.
How are Assets Evaluated when they are Deemed as Collaterals?
Lenders price your asset for a considerably less amount than their present market worth. For instance, if you are keeping your portfolio as collateral then lenders will value it around 50% of the value of investments lest they lose market value amid the term of your loan period. When you mortgage out your house, lenders generally let you borrow up to 80% of the value of your mortgage.
Where to get Secured loans for Small Business?
You see that there are many lenders in the market, but we have handpicked 3 loan providers because they stood out from the lot. They are:-
They barely turn down any loan application. A decent credit score of more than 600 is required. They are always ready to estimate your collateral fairly which often translates to lower APR.
The club is the best place to find a loan so the bar is where you won’t go… err cheesy, isn’t it? No one has got a simpler and more transparent loan approval process. Period
Best for those businesses who haven’t taken the fight yet but are very promising. Focussed on the working capital needs, Credibly goes the extra mile to help new businesses in ascending to the heights.
Attention all Personal Loan Seekers
Why would you put your Granny’s jewelry or your house on the line when you can hustle without it? Why go for personal loans with collateral? There are unsecured personal loans galore in the market.
The application process is almost the same except it saves you the pains of getting your collateral approved and provide shreds of evidence to prove our ownership.
You can easily get an unsecured personal loan at competitive rates with:
- Good or excellent credit
- Stable income from a full-time job
- A low Debt to income ratio
It’s not that a personal loan with collateral is not a good option for personal loan seekers. It has got its pros and cons and you have to weigh your choices and other crucial factors have to be considered before taking the final call.