Collateral Loans Pros and Cons

Posted on January 17, 2016 By

Collateral Loans Pros and ConsThese are also referred to as secured loans. When taking out a collateral loan there are many pros and cons, which a person should consider before taking out such a loan. There is no risk to the lender because if the borrower does not pay back the loan the lender has the collateral that the borrower used. Many times with a collateral loan you can get a lower interest rate and a longer period of time to repay the loan. Before applying for a loan figure out how much money you are going to need. You should avoid taking out excessive collateral loans because in the end you will paying back more money. To get an idea of how much you can borrow you should calculate your monthly expenses and monthly income and then decide after seeing how much you have left, how much of a monthly payment you can afford.

Next you will decide what you will offer as collateral because many times what you offer as collateral will help to determine what the rate will be for your loan. A collateral loan can be used to consolidate a debt, home improvements, vacation, or major purchase. When applying for this loan the loans that the bank or lender will give you against collateral will usually be percentage of the estimated market value. For example, if you are using a car that is worth twenty thousand dollars the lender would most likely offer you a collateral loan of seventeen thousand dollars, or approximately eighty-five percent of the value of your collateral.

Pros

• It is an easy loan to get and usually is quickly approved
• The borrower can usually borrow more money that they could with an unsecured loan, which is the type of loan that you would need a good credit score, steady employment, good income to get it.
• If you are turned down for an unsecured loan many times a person can get a secured loan.
• There is not a cap on how much a borrower can borrow.

Cons

• What the borrower used as collateral is at risk if they cannot pay the loan back in the time agreed upon.
• A collateral loan is not available to just anyone as you will need to own a vehicle, house, or another piece of property that can be used as collateral and if you do not have any of the three you cannot get this type of loan.

As you can see there are more pros than cons when considering a collateral loan but do make sure that you do not borrow more than you can pay back.

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