If you’ve ever considered taking out a secured loan, you’ve likely heard of the term “collateral.” Unlike unsecured loans, which go by your credit report and other factors, secured loans require you to attach something of value – such as your vehicle or home – to them to mitigate lender risk. You can get a title loan on a financed car, for example, if you have enough positive equity in the vehicle to use it as collateral. But perhaps you aren’t clear on what collateral is and how it works. Read on.
What is Collateral?
Collateral is an asset of value that you can use to secure a loan with a lender. Vehicles and houses are common examples of collateral.
You should understand that if you fail to repay your loan, the bank or other lender can seize the collateral – your property – and sell it to recoup its losses. On the other hand, secured loans are less risky, and so are easier to get than unsecured loans. Sometimes, you can offer collateral to get a loan for which you otherwise wouldn’t qualify.
How Does Collateral Work?
Loan collateral backs up your pledge to repay your lender with a material asset. If you take out a vehicle loan, for example, your new ride is now collateral and secures the loan. The collateral’s value is typically enough to cover the lender’s loss should you default. If it’s not, the lender could sue you for the remaining balance. Note that once the loan is repaid, the lender’s claim on the asset is removed.
What Can I Use as Collateral?
The kind of collateral you can use usually depends on the loan type. We’ve mentioned that you can use your new vehicle to security your car loan. If you’re seeking a mortgage, the house you’re purchasing will serve as collateral. Those who already have a house can use their equity for a home equity line of credit or home equity loan.
At times, you can also use a deposit account such as a CD, money market account, or savings account as collateral. Investments, too can be used, along with other valuables such as antiques, jewelry, and art.
What Kind of Loans Require Collateral?
Secured loans such as mortgages and auto loans use collateral, as do home equity loans and HELOCs. Secured credit cards use cash deposits as collateral.
It is true that title lender ChoiceCash can use the title of the car, truck, or SUV on which you’re still making payments as collateral for a short-term loan to get you out of a jam. How so? The main proviso is that you have sufficient positive equity, meaning the vehicle’s market value exceeds the amount owed on it. ChoiceCash, which is serviced by LoanMart, will provide you with an online title loan calculator to get a vehicle equity estimate.
The other primary requirement for a title loan is proof of income. You don’t need good credit, however, and you could have cash in hand within 24 hours of application acceptance. And you do get to keep driving your vehicle during the repayment process.
In Summary
It’s always good to understand the term “collateral” before you need to use it for a secured loan such as with LoanMart. You must be absolutely certain you can repay the loan, however, or risk losing your property to the lender.
