When it comes to the need for availing a loan, there are various types of loans as well as other modes of cash advance available for the borrowers to consider. Often times, lenders may be putting forth the option of a secured loan, which has clear benefits to the lenders as you provide some collateral as a security for your loan.
In fact, if you have some collateral to pledge, a secured loan is an attractive option which has a lower interest rate and lesser complication than otherwise. For business owners too with assets, providing some collateral for funding may sound appealing. But, you need to have an understanding of what do lenders accept in terms of collateral to approve secured loans. To start with it is essential to what secured loans are all about.
The concept of secured loan
If a borrower pledges their property or any valuable assets as a guarantee to their loan payments, it is counted as a secured loan. The collateral can be taken over by the lender if the borrower defaults the repayment of loans.
By securing the loan through this way, the borrower reduces the risk to the lender to a big extent. If you are finding it difficult to get a loan of reasonable terms or struggling to get it approved, secured a loan with collateral may be an ideal option, which also comes with a lower APR.
You may want back your loan up with collateral if:
- You have bad credit, like a score of less than 680.
- You are already in debt with a debt-to-income ratio (DTI) of above 43%.
If you own any valuable assets like home, car, or machinery (clear off any debt), it makes you eligible for larger loan amounts. Also, if you are a sole proprietor of your business, you can use your business asset as collateral for a loan.
As we have seen above, collateral reduces the lender’s risk. The business finance lenders usually demand collateral of any kind to guarantee repayment. You get cash advance in the same terms when you take a car loan or housing loan etc., where the car or house you buy with the loan itself acts as the collateral for the loan.
Acceptable collateral to be pledged for a loan
Various lenders do different types of valuation in terms of collaterals. Here is the list compiled by https://www.libertylending.com/ of some generic and most acceptable collateral for personal as well as business lenders to pledge.
For personal loans
- Real estate
- Home equity
- Savings accounts
- Investment accounts
- Pension account
- Jewelry etc.
For business loans
- Blanket lien
- Real estate
- Properties like machinery or equipment
- Business assets like vehicles
- Business products
- AR (accounts receivable)
- Processed inventory
- Natural reserves
- Savings, investment or current accounts
- Paper policies
- The vehicle purchased
- Other personal vehicles owned
- Home equity
- Savings account
- Investment accounts
- Paper policies of investments.
Valuation of assets
Lenders used to offer you lesser money than the actual value of the collateral asset. It may range anywhere from 50% to 90% of the actual valuation. Sometimes, it can be even lesser based on the type of loan you avail and the lender’s policies.
Say, for example, if you use an investment portfolio as the collateral, considering the volatility of the investment market, lenders may not even offer you 50% of the actual current value of your investment with the fear of a huge loss in value by the time you loan gets matured. However, when borrowing against fixed solid assets like your house, lenders may offer more like up to 80% or 90% of the LTV (loan-to-value) ratio. To calculate the maximum borrowing amount, you have to subtract the current loan balance on the pledged property and multiply it with 80%. In the case of loans against automobiles, the loan amount may just range between 25% to 50% of the actual valuation of the vehicle.
Pros and cons of collateral-based secured loans
- Quick as well as easy approval – With effective mitigation of risk, there is a high chance that your collateral loans may get quick approval.
- Lower interests – If you have an excellent credit history, then lenders may put forth premium rates for you. However, if the score is low, then providing collateral security may probably bring down your interest rates with lowered risk to the lender.
- Room for negotiation – With lesser risk to the lender, you have enough room to negotiate over interest rates and longer term. You can often get terms which may fit your budget. Cutting down the loan term will reduce your overall cost.
- Losing possession – Defaulting repayment of your secured loan will end up in losing whatever security you put in. Say, for example, consider how painful it will lose a necklace given to you by your great-grandmother or the car which you own.
- Overspending – Providing security may give you a better leeway. This may ignite the scope of overspending also as you have in hand more than what you actually need. However, getting additional means, you have to repay an additional interest too.
- Longer term – Longer repayment term is usually associated with secured loans, which may sound great as you have the only lesser monthly burden to bear. However, this means you have to pay more interest over the span of repayment.
The bottom line
There are plenty of options while you plan to take a personal loan or business loan with or without security. While trying to take a secured loan, always consider your current situation and ability to repay the loan before signing up for it properly. Defaulting on the secured loan also will end up in damaging your credit score plus you will lose your valuable assets too. If secured loans are not actually fitting into your needs, one can consider unsecured loans which do not require collateral but have a higher interest rate.