Everyone needs security to defend themselves during difficult times. The same applies to lenders and borrowers. When a borrower assures a lender with some form of asset as a guarantee while they ask for a loan, it is collateral.
The lender rests secure that if the borrower cannot repay the loan amount, this collateral ensures they suffer no loss. This makes collateral for personal loans fall under the category of secured loan type.
In this article, you will learn more about what can be used as collateral for a personal loan and how one secures such loans.
What Can Be Used As Collateral For A Personal Loan?
Secured personal loans require collateral such as a car, house, or savings account to ‘secure’ the loan. Similarly, unsecured loans do not involve collaterals. While applying for unsecured loans, lenders must prove they are worthy by having excellent credit scores.
Collaterals that can be used for personal loans include house, insurance policy, any asset or property such as a boat, car, land, or valuable items, including gold, antiques, or stocks.
Pension funds like 401(k)s and IRAs are not considered collateral. Some lenders may also reject the collateral on a car over five or seven years old.
What Is Collateral?
Collateral is a form of asset given as a security to the lenders and returned after repayment of loans. This asset provides security if borrowers fail to repay the loan on time. It protects lenders from loss or defaulters in the lending process.
The lender has rights over that collateral and seizes the property, car, or bonds if loan repayment is not done. In personal loans, collateral is essential to get loans at lesser interest rates. Most lenders charge relatively high-interest rates with these and adequate credit history.
Pros and Cons of Collateral on a Loan
Some benefits of secured loans are:
- Having collateral could increase your chances of getting a loan.
- Secured loans are more flexible as they reduce the lender’s risk.
- These loans usually have lower interest rates and more extended repayment periods than unsecured ones.
Secured personal loans come with the following cons:
- If you default on the loan, the lender may seize your collateral.
- A lender might hire a debt collector, report your missed payments to credit bureaus, or even take you to court to get the money back.
- Borrowing money may come with restrictions from the lender.
- Secured personal loans can come with high interest rates or fees, especially if you need better credit.
What to Know Before You Sign a Loan Agreement?
Always read the proposed agreement in detail, whether a secured or unsecured loan agreement. The terms and conditions may have in-depth layers of information. Sometimes, lenders are crafty, adding conditions in between lines that, despite timely payment, might cause you to lose collateral due to other reasons. One must stay cautious about such fraudsters.
What if You Don’t Have Enough Collateral for a Personal Loan?
You can choose an alternative to a secured personal loan if you need more assets or do not have the assets an originator requires. Depending on your situation, you can choose from several options.
In some cases, you can borrow money from your retirement account and then repay yourself with interest. Other than this, in case of emergency, a higher interest rate unsecured loan is also available. Credit history plays a vital role in such cases. If you have an excellent credit history, you can take out a loan at a standard interest rate using that.
You can also try Beem’s personal loan feature to get all the information you need on personalized rates and explore loan options ranging from $500 to $100,000 without impacting your credit score!
Do All Personal Loans Require Collateral?
Most personal loans are unsecured lending products without collateral requirements, but some private loans may require collateral for loan approval. A collateral loan may be an easier option for poor credit borrowers. Collateral reduces lenders’ risks and serves as a guarantee of a borrower’s repayment capability.
Conclusion
What can be used as collateral for a personal loan depends on the kind of loan and who you are borrowing it from. Secured personal loans that come at an affordable rate and from trustworthy lenders are hard to find. You can always rely on Beem to get personal loans, which are secure and affordable. With Beem, you can get cash during emergencies quickly.
Remember, loans are safe if you can repay them on time. A secured loan is an opportunity to improve your credit history. A timely paid loan can boost your credit scores in a short period.
FAQ’s
How much loan can I get without collateral?
One can get up to $100,000 as a loan without collateral. People take about $60-70k loans without collateral, but their interest rates are high.
What cannot be used as collateral for a personal loan?
Funds like a retirement account 401(k) or IRA do not qualify as collateral for perusal loans. One can use a car, home, or savings account as collateral for a loan.
Is it wise to use a car as collateral for a loan?
It is a wise option if you have an excellent credit history. Banks also offer other benefits for loans against your car if you have a timely payment history.
Can you use jewelry as collateral for a loan?
You can use gold, silver, or any precious metal jewelry as collateral for loans. Artificial, plastics or other jewelry do not qualify as collateral.
