Loans can be broadly grouped into two categories: secured and unsecured loans. An unsecured loan is a type of loan given without any collateral to back it up - just your promise to repay. Traditional lenders give this type of loan based on the borrower’s credit score. This system rates your ability to repay the loan based on past credit performance and your general financial situation. It’s a complex and often difficult-to-access method of getting a loan. 

The other option is a secured loan, which is backed by some form of valuable asset as collateral. A secured loan has nothing to do with your credit score. In fact, unlike unsecured loans, where failing to repay will affect your credit score and future opportunities to access a loan, a collateral loan has no impact on your credit score. 

So, how does this loan work, and how do you access it? This guide explores all you need to know about getting a collateral loan against your asset.  

What Is Collateral?

To understand how to get a loan using collateral, you should know what collateral is to begin with. This is an asset that a borrower can offer to a lender to qualify for a loan. Unlike unsecured loans, where the lender simply takes your word for it, an asset stands as security to help you obtain a collateral loan from a lending company. 

Providing collateral can make the lender more confident in your ability and willingness to repay the loan. With this type of loan, there isn’t a lot at stake for the lending company since they can easily sell off the asset if you fail to repay the loan at the agreed time. This will cover the loan and compensate for any losses. Due to this fact, Collateral loans are generally easier to get compared to traditional unsecured loans, requiring no paperwork or credit checks.

Benefits of Using Collateral to Secure a Loan 

Putting up an asset as collateral to secure a loan has several benefits. For some people (borrowers with poor credit history or no credit history at all), this might be their only option to access a loan. However, borrowers with other viable options for securing a loan should weigh the pros and cons of this type of loan before applying for it. The following are some of the main benefits of using collateral to secure a loan: 

• Easy to get: pledging an asset as collateral makes it easier to obtain a loan. Generally, secured loans are easier to get compared to unsecured ones. This is particularly true for borrowers with a poor or insufficient credit history who will naturally have trouble getting an unsecured loan. 

• Access to more cash and favorable terms: Secured loans are generally less risky for lenders since they have a backup plan to recover any money they give you. As a result, you may be able to borrow more money than you would have been able to get without collateral. Secured loans also tend to offer lower interest rates and longer repayment periods compared to unsecured loans. 

• No negative impact on your credit: This is arguably the biggest benefit of obtaining a secured collateral loan. Lenders that offer this type of loan don’t need to do a hard credit check to determine your eligibility. Additionally, your inability to repay the loan will have no impact on your credit rating or chances of obtaining a future loan. 

Where Can You Find Loans With Collateral?

If you’re ready to obtain a collateral loan, you need to know how to find lenders willing to provide this type of loan against your asset. Your options include: 

• Banks and Credit Unions: A bank or credit union is most people’s go-to solution to obtain a loan. While these traditional lenders mainly provide unsecured loans based on your credit score, a few of them allow you to use assets such as your car or real estate property as collateral for a loan. 

• Specialized Lenders: Many specialized lenders focus exclusively on offering secured loans to customers. Unlike banks and other traditional loan providers, these specialized lenders allow a wide range of assets to be used as collateral. For instance, a lending company like AMETA will give collateral watch loans to applicants.  

• Pawnshops: Instead of simply buying your asset, some pawn shops provide the option of obtaining a loan with it. The only problem with pawn shop loans is that most of them are unregulated, leading to high interest rates and unfavorable repayment terms. 

How to Get a Collateral Loan

By nature, a collateral loan is generally easy to obtain. Lending companies that provide these loans are always willing to approve your application as long as you provide an eligible asset. If you wish to get a loan that will not impact your credit rating, here are the steps to follow:

Initiate the Application Process

The first step is to look for a provider that accepts the kind of asset that you have to offer as collateral. Once you identify a lending company, you can initiate the process by either visiting the lender’s physical location or filling out an online form. The lender will explain the other stages of your application and may provide a rough quote based on the details of the asset that you have provided. 

Expert Appraisal

The amount of money you can get with a collateral loan depends almost entirely on the value of the asset in question. Lending companies will have to carry out an appraisal of your asset to determine its current market value and how much you can get for it. To get this done, you either ship the asset to the lender or schedule an appointment for an inspection. 

Receive Loan Offer

Once the appraisal has been concluded, the lending company will determine how much you can realistically get with your collateral. Most lenders will give you 60% to 80% of the collateral’s value as a secured loan. The condition of the asset, age, and specific type will contribute to the actual valuation. Note that your credit information has nothing to do with the outcome of your application. The loan offer will contain all the details of the loan, including the interest rate, loan duration, additional costs (such as monthly storage costs for the asset), and other vital information. 

Loan Disbursement

After reviewing the loan offer and signing the agreement, the lender will transfer the approved amount to your bank account. This is usually done via wire transfer within 24 to 48 hours of signing the loan agreement. 

Repayment and Asset Retrieval

For smaller assets such as a luxury watch or bag, the lending company takes possession of the asset. Bigger assets, such as cars or real estate, will have a lien placed on them that prevents you from selling or transferring ownership until the loan is repaid. You may also need to submit documentation that confirms ownership of these assets. Once the loan, interest, and any other associated fees have been fully repaid, the asset will be returned to the borrower in perfect condition. 

Things You Should Know Before Getting A Collateral Loan 

Before applying for a collateral loan, there are certain things you should know about this type of loan. Knowing these pieces of information will determine if you should take this loan and also help you compare loan offers from different providers. 

• You can lose your asset: While collateral loans don’t have any impact on your credit, you do risk losing your collateral if you fail to repay the loan. This is how the lending company recovers its money from defaulters. Before taking this loan, you should evaluate your financial situation and ensure you have the resources needed to keep up with the monthly repayment. 

• Learn the interest rate and other fees: Before you take a collateral loan, you should learn what the interest rate is. This varies from one provider to another and may also depend on your collateral. Lenders will also charge additional fees for appraisal and secure asset storage, which will add to the overall cost of the loan. 

• Consider the lender: collateral lending is not as regulated as the traditional lending industry. To avoid falling into the wrong hands, make sure you research the lending companies thoroughly and have a professional review the loan offer before signing an agreement. 

Conclusion 

Getting a loan all comes down to what you’re willing to offer for the loan. While many lenders consider your credit history and financial capabilities, others only need you to provide collateral for the loan. If you have an eligible asset and you want a loan that will not affect your credit history, then you should absolutely go for an asset-based collateral loan. Just make sure you’re borrowing from a reputable lender with a good track record.