4 Reasons to Take Out a Loan Using Collateral

Personal loans can be secured or unsecured. A secured loan requires the borrower to pledge a valuable asset as collateral. This may be a house, car, cash in a savings account or certificate of deposit, jewelry, fine art, or collectibles. If the borrower fails to make payments, the lender has the right to seize the collateral.

A secured loan can be risky unless you’re confident you can repay it according to the terms of your contract. This is why it is important to understand what a secured loan is and how it works. Continue reading to learn more about why it might be beneficial to out a loan using collateral.

Types of Secured Loans

Not all secured loans are created equal. In fact, there are different types of secured loans available, such as: 

• Mortgages: A mortgage helps you buy a house. But, if you default on a mortgage, the home may foreclose.
• Home equity line of credit (HELOC): Just like a mortgage, a HELOC is secured by your house. The HELOC works like a credit card, allowing you to withdraw funds as you need. The value of the HELOC is based on the equity of the home. Home equity is the difference between the home value and what is still owed on the mortgage.
• Car loans: A car loan is used to finance the purchase of a car. The lender may repossess your vehicle if you’re unable to make your payments.

Top Four Reasons to Get a Collateral Loan

There are a number of reasons you might want to consider a collateralized or secured loan, including:

1.   It may be Easier to Qualify For

If you don’t have the best credit, you may still get approved for a collateralized loan. Since these loans pose less risk because the lender can recoup losses if a borrower defaults, many lenders are more open to lending funds to those with less-than-perfect credit.

2.   Lower Interest Rate

The good news is that secured loans tend to come with lower interest rates. A higher interest rate can cost a borrower hundreds or even thousands of extra dollars. Regardless of your credit score, you may be able to find an attractive rate. Of course, the better your credit, the lower the rate can be.

3.   Higher Borrowing Amount

Compared to most unsecured loans, secured loans offer a higher borrowing amount. You may get approved for a loan of tens to hundreds of thousands of dollars. This depends on the lender, the loan you apply for, and the value of the eligible collateral you provide.

4.   Many Options

Many lenders offer secured loans, making it easy to shop around, compare options, and make the right choice for your unique situation. You can even prequalify for some secured loans and explore loan terms without any impact on your credit.

Alternatives to Secured Loans

If you don’t want to take out a secured loan or are having trouble qualifying for one, there are other options. A credit card can be a great way to cover your day-to-day expenses. Another option is an unsecured loan, which would require no collateral, but you would need a decent credit score to qualify. In addition, you can borrow money from friends and family or pick up a side hustle like food delivery or ride-share.

The Bottom Line

A secured loan may help you meet a variety of financial goals. This loan may be easier to get and commonly features a lower interest rate and/or a higher borrowing amount than an unsecured loan. Always research and weigh your options according to what works best for your situation.

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