Over the last 3 to 5 years, living expenses in the USA have gone up by roughly 14%. That means, despite unemployment rates in America being historically low, people are struggling.
To manage their poverty, many turn towards loans. Unfortunately, getting a loan can be a struggle, unless you take it from your life insurance.
Most lenders will require that loan recipients have reliable income and stellar credit. Those requirements leave the most vulnerable among us unable to get their hands on borrowed money.
A workaround that several borrowers are flocking towards to circumvent lending restrictions is the ever-popular personal loan with collateral. Personal loans with collateral carry numerous pros and cons. Below, we’ll be exploring what these loans are and why (or why not) you should consider them.
What Is a Personal Loan With Collateral
Before we dive into all the pros and cons of personal loans with collateral, it’s important to understand what this type of loan entails. Personal loans with collateral are lending products that give money to borrowers in exchange for property.
That property can be anything from non marginable funds (securities) to car titles.
Collateral serves as a safety net for lenders. If browsers do not pay back the debt they’ve taken on, lenders can reimburse themselves by claiming and liquidating their borrower’s staked cars, homes, jewelry or other items.
Collateral Loan Advantages
The reason why collateral loans are growing in popularity is that they carry several benefits. Here are three of their most notable perks:
Since collateral secures lenders, they’re more willing to approve borrower’s loan applications than they would be without collateral. This makes collateral loans accessible to a wide swath of borrowers no matter their financial backgrounds.
Flexible Funding Amounts
Even if you qualify for a non-collateral-backed loan, the loan amount you’re approved for may be too low for your needs. Collateral loan amounts are flexible.
Depending on the value of the property you stake as collateral, the amount you’re able to get from a lender can be exponentially high.
Plethora of Lenders
Collateral loans are offered by almost every local lender and several online lending institutions. This makes them widely accessible even if you don’t reside in a major city.
Where you live may have an effect on the types of collateral your lender allows you to stake. If you’re curious to know what kind of property qualifies as financial backing, contact your prospective lender directly.
Collateral Loan Disadvantages
While the ease in which collateral loans can be obtained makes them attractive, they’re not without their drawbacks. The following are primary elements to watch out for when taking on a collateral loan:
You Could Lose Your Property
As we’ve noted, if you’re unable to pay your loan back, your lender can repossess your property to absolve your debt. If you stake property that you need like a car or home, this arrangement could create a serious problem.
It’s imperative that you only take out a personal loan with collateral if you’re confident you can pay it back. Furthermore, you should avoid putting down collateral that you can’t safely afford to lose.
Your Property Will Be Undervalued
If you purchase a car for $10,000 and a week later try to take out a collateral loan against it, you may only get 50% to 60% of what you paid for it in loan money.
This is the case because lenders want to insulate themselves from the depreciating value of your property and because they want to not only absolve your debt but turn a profit.
Consequently, the valuation that borrowers get on their property can sometimes cause frustration. Be prepared for this and accept that almost no lender will let you borrow against your collateral’s full market value.
Terms May Be Predatory
Most people that take on a personal loan with collateral do so because they have financial issues. Lenders prey on those issues by offering loans that carry predatory interest rates and fees.
To avoid falling prey to poor lending terms, study your loan carefully. The better you understand what you’re getting yourself into, the less likely you’ll be to fall into a dire financial situation.
Are There Viable Alternatives to Collateral Loans?
If collateral loans have you feeling uneasy, we don’t blame you. They certainly carry risks that the average person would prefer not to take on.
Fortunately, other loan options exist which could better support your needs with less downside. A few of these options include:
Borrowing From Family and Friends
If you have family members or friends that are willing to lend to you, consider taking them up on their generosity. In most cases, loans sourced from loved ones do not carry crippling interest rates and fees which is a step up from what many lenders offer.
Borrowers with good credit will likely qualify for excellent loan products that don’t require collateral. These loans put most of the pressure on lenders rather than borrowers.
Credit cards are a lot like personal loans you can borrow against whenever you want. If you pay off your credit card balance each month, you won’t even have to pay interest.
Take Your Time to Find the Right Loan Option
When you need money, desperation may cause you to grab at any type of loan within reach. We recommend you be more selective than that.
By taking the time to study loans and pick the best option, you will likely save yourself money and headaches.
Whether you take on a personal loan with collateral or another loan type, know that we welcome you to browse more of the content on our blog to continue making informed decisions!