Securing a loan for yourself or for your business can be a tough decision to make. But you may not have a choice if you don’t qualify for an unsecured loan. These secured loans, also called collateral loans, are supported by some kind of asset belonging to the borrower. That way, if there is a default, the asset can be claimed by the lender as payment.
Having a mix of collateral assets can make it easier for you to secure a loan much faster, but not everyone knows what can be used as collateral. To make it easier for you to figure out, here are ten types of collateral that the majority of lenders will accept.
- Real Property
This can be your home or any property that you own. It is one of the most common kinds of collateral and the first one that lenders will suggest. If this seems like an attractive option, you can take out a second mortgage on your home to serve as collateral for the loan. First, you should ensure that you qualify for a signature loan.
But be sure that you borrow wisely if you choose to do this: one wrong move and your home can be taken. Make sure that the payments on the loan are ones you can afford. Avoid lends who use predatory tactics such as using pressure to force you to make a decision sooner, not disclosing all of the details to you, or not giving you copies of forms that you’ve signed. These are all red flags that should tell you to walk away.
- Secured Car Loans
Your automobile is also another important piece of property that you can use to secure a loan. The best means of using it as collateral is to get a secured installment loan that have affordable terms. Don’t go for car title loans, as they tend to have very high APRs and the repayment periods are very short, usually 15 to 30 days. Not a good choice if you’re getting a big loan. Shop around to find the best loan for your needs that you can pay off without breaking the bank or your wallet.
Your stocks and investments can be used as collateral; these are called securities-based loans or stock-based loans. These kinds of loans are usually offered by private banks or brokers to borrowers who already have investments in these companies. Taking out a loan with this kind of collateral will provide you with the full value of the investment’s portfolio.
This can be a risky move, however, as the value can fluctuate with the market. At the end of the transaction, you may or may not end up having to pay a little more than what your portfolio was originally worth. It’s an unpredictable means of securing a loan when you don’t know how the market is going to be, week to week.
Also, not all investments are subject to being used as collateral. IRAs and 401ks cannot be used as collateral for secured loans.
- Savings-secured Loans
These are loans that are usually offered by banks or credit unions to their already-existing customers. They’re one of the easier loans to qualify for. This involves using liquid cash in deposit accounts as collateral which can be used by borrowers as they need it. This is one of the better choices, as borrowers can earn interest on these accounts that they can then use as extra collateral.
However, the interest rate usually ends up being lower than the rate of the loan itself. This can lead to a lot of juggling of finances in order to pay everything off; in these cases, it can be a little easier to pay with cash out of pocket rather than taking out this kind of loan. If you’re one of those people who has a bad line of credit, however, then this is a great way to get your credit score up so that you can secure better loans in the future.
- Future Paychecks as Collateral
Also called a cash advance loan, you agree to pay back a loan with paychecks you receive in the future. This is one of the harder loans to qualify for, as lenders are taking a risk that you’ll keep this promise as well as maintaining your current employment long enough to pay off the loan. They offset this by requiring payments to be returned very quickly, usually on the receipt of the next paycheck. This can leave you with very little opportunity to plan your finances ahead of time, especially if you have a lot of other financial responsibilities.
If you’re seeking a loan for your business, you may be able to use the inventory or stock you have as collateral. Of course, this option only works if you have a business that is product-based; a service-based company is not going to work. In taking out this kind of loan, expect the creditor to send an auditor to your business’ location in order to assess the value of your inventory. They need to be sure of its worth so that it can really be used to offset the amount you’re borrowing. This value can be protected by storing your inventory properly to minimize depreciation in value.
In another light, many businesses do what is called inventory financing: they’ll purchase items that they will set later and use the proceeds to pay off the loan. In the case where you’re not able to sell them off, defaulting on the loan means that the lender seizes it all. However, if they’re not able to sell it either, then they may have to sell at a loss. Because of this, not many lenders are eager to take on this kind of loan.
Having customers that don’t pay or are late to pay can be extremely annoying, but did you know that you can use them as collateral for your loans? Instead of dealing with the hassle of non-paying customers, you can trade them off to lenders for cash that you need at that moment. In turn, these customers become responsible to the lenders for payment instead, meaning you no longer have to hound them for money.
This is called invoice financing and is a great option for borrowers who don’t have a great line of credit. This results in lenders foregoing the money they would have received from their customers, they now have the income and flexibility from the loan to continue conducting their businesses.
- Blanket Liens
A lien is less of a tangible asset and is more of a legal claim that is attached to the loan itself. When a blanket lien is created, the lender is allowed to sue the business and collect any assets when there is a default. The assets are never usually specified, leaving it up to the lender to take what they want. This is the most attractive options for lenders, as they can exercise whatever scrutiny they want and take anything and/or everything to fulfill the value of the loan. Not such a great choice for a borrower, however.
When a blanket lien is created, it makes it even more difficult for a borrower to get a subsequent second loan. This is because if the first lender claims a lot of the property, it will be even more difficult for the second lender’s loan to be satisfied.
- Valuable Personal Belongings
It is possible to use valuable personal belongings such as expensive jewelry or collectibles as collateral. A third party is usually called into play to determine the true value of these belongings so that they can be properly used and weighed against the value of the loan. It’s a great choice if you have a lot of antique jewelry lying around that you’re not doing anything with, as long as everything is in good condition.
- Natural Reserves
Working in the coal or oil industry will grant you access to using natural resources as collateral for a secured loan. The loans are based on the value of these resources at the time, however, which can fluctuate within the market. To avoid problems, the loans are usually determined at a fixed price to avoid any complications in the future. Not a very popular option, since not everyone has access to owning natural oil, gas, and coal reserves.
Obtaining a secured loan may be easier than you think if you have the right collateral to support it with. And don’t think that you only have to offer up one of the ten mentioned above; having a mixed array of collateral attached to a loan is actually a better option, as its spreads the “damage” around should you happen to default instead of putting all of your eggs in one basket. It also guarantees to the lender that you’ll always have something to offer to fulfill the loan obligation.