The finance sector constitutes high risks, especially for lending businesses where both established financial institutions and payday companies experience similar impact on loan issues; that is, potential gain when the loans are repaid with interest or loss when the clients default on their payments.
To control the risks involved, most lending institutions have secured financing options, including collateral to back up the client’s loan. Collateral acts as a haven for the institutions should the borrowers fail to pay their debts. Collaterals may include borrowers’ cars, equipment, cash in a savings account, machinery, accounts receivable, trademarks, and copyrights.
With secured financing, the lenders are well protected and have adequate control of the issued loans and legal claim to their client’s property.
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Commonly Used Collaterals
Several items can be used as collateral when applying for loans to either ease your way into accessing the finances or as a requirement by the lending institutions. Some commonly used collaterals are:
Real Estate
Most borrowers use real estate as their collateral, including a parcel of land or their home, since they are of a high value and relatively low depreciation rate. It is risky, especially when the loan repayment is uncertain; the owner cannot take it back once the financial institution possesses the property due to loan default.
Cash At The Bank
Cash at the bank is a simple way of securing a collateral loan. The borrower actively maintains one or more funded accounts, which the bank can liquidate to recover the money if there is a default.
Invoices
Invoices are used mainly by small businesses to take loans from financial institutions. Failure to repay the loan gives the lender a chance to directly access money from the businesses’ customers via unpaid invoices.
Types of Collateral Loans
Financial institutions often offer loans when there is substantial collateral to back the loans. Some of the common types of collateral loans include:
Mortgage
Mortgage, also known as home loans, is a common form of secured financing. Failure to make payments makes it possible for the lender to sell your home and recover the debt.
Secured Personal Loans
Most companies offering personal loans such as Viva Payday Loans do not often mind collateral since they have other terms of operation that clients need to understand before proceeding with the loan application. However, when a borrower issues collateral to the lender, there are higher chances of accessing the loans at more favorable terms than the client without collateral.
The borrower can issue some of their assets, such as jewelry, vehicles, collectibles, etc. Those with bad credit scores are not barred from applying for loans from most personal loaning companies, and if you do not have a convincing credit score, you can access bad credit payday loans online at Viva Paydays.
Vehicle Loans
A loan taken to finance the purchase of a car, motorcycle, plane, or truck is secured by any of the assets involved. Failing to pay such loans results in default, which incurs the same consequences as a mortgage where the lending institution repossesses the vehicle.
Pros and Cons of Collateral on Loans
Using collateral to acquire loans may seem to be a good idea. However, there are both positive and negative sides to it.
Pros:
- You are more likely to be approved for a loan than you would have been without collateral, increasing your chances of easily accessing loans.
- Lenders can issue you with higher loans if there is collateral since the risk is significantly lower than the amounts you would have been offered without collateral.
- Loans secured by collateral attract lower interest rates, and the borrower may also be allowed a more extended repayment period.
Cons:
- If you fail to repay the loan, you can lose your property, which is riskier when you secure the loan with high-value assets like a parcel of land or your home.
- You need a valuable asset to offer the lender. The value may not convince financial institutions and other lenders of assets you are issuing as collateral; you must recognize the asset as of value, failure to which your loan may not be approved. So, you need to have valuable assets first for collateral.
Bottom Line
Secured financing is excellent for those with steady income flow since the borrowers are likely to keep up with the loan repayment. If you use collateral to secure loans, you should be aware of the consequences of defaulting despite the benefits you get earlier on during your loan application.
