The type of collateral to offer for a secured loan depends on factors such as bank of choice, amount required, location, and many others.
Collateral for Personal Loans
While businesses offer assets such as equipment and machinery, inventory, and plants and buildings, applicants for a personal loan have other options to choose from. These include real estate, home equity, vehicles, collectibles, and others. Real estate and home equity, for example, are ideal for larger, long-term loans. Another option is to offer tools of trade such as forklift or truck. Investment instruments such as treasury securities and certificates of deposit are also accepted by financial institutions. Other investment instruments include bonds, shares, and other liquid marketable securities.
One option is to offer your home equity as collateral. Financial institutions feature different options such as cash-out refinance, line of credit, home equity loans, and mortgages. When applying for a mortgage or line of credit, your financial institution may offer 80 percent of the appraised value. This varies from lender to lender. In some cases, the payments are tax deductible, but it is best to ask your tax advisor.
Using your home equity as collateral is one way to get access to a large lump sum. This is an option if the interest rate has dropped considerably. Another way to gain access to financing is to offer your car as collateral. Refinancing and financing are two alternatives to consider. There are two options – to apply for a loan or borrow against the value of your car.
Finally, you can use your savings account or certificates of deposit as collateral. Banks offer lines of credit with a variable rate and loans with fixed interest and fixed terms to be paid in installments. The interest rate and terms depend on your credit score, income, verification of collateral, and other factors.
Reasons to Offer Collateral
Banks accept securities that can be converted into cash. The amount offered by financial institutions depends on the value of the asset or security. And the reason behind offering collateral is to secure a more attractive interest rate and favorable conditions. It is usually borrowers with poor or fair credit who apply for secured financing because they are unlikely candidates for secured loans. Banks require collateral when the applicant is considered high risk. This means that the likelihood of default is higher. If the loan goes bad, the financial institution is not in a good position to require prompt repayment. When collateral is offered, the bank has the right to seize the asset and sell it to cover the outstanding balance. With cash out refinancing, borrowers apply for a new loan and repay their existing balance.