What Is a Collateral Loan?

Estimated reading time: 3 mins

When you’re in need of funding, you have a lot of options. You can get a personal loan, get a revolving line of credit, or take out credit cards.

When you’re shopping around and looking at you’re options, you’re likely to come across the term collateral loan.

It can make the whole loan process difficult to understand. Read on to learn what is a collateral loan is and how you can get one.

What Is a Collateral Loan?

Loan shopping is confusing enough and then you see terms like collateral loan or secured loan. They actually mean the same thing.

With a collateral loan, you’re providing collateral in exchange for the loan. The most common collateral loans are mortgages and auto loans.

A mortgage is a collateral loan because you put your house up as collateral as part of the agreement to get funding. Should you miss a payment or two, the bank has the ability to take the home back.

A car loan is backed by your car. Other loans use savings accounts as collateral. These loans are common when you’re borrowing large amounts of money.

You can learn about collateral loans in this guide.

How Does That Differ from Other Loans?

Collateral loans differ from other types of loans not only because they’re guaranteed by the property of the borrower. It’s because they offer lower interest rates, too.

It really comes down to the level of risk a bank takes on when it lends money, whether it’s a credit card or a type of loan.

When you borrow money have nothing to go on besides your credit score and income, the bank is taking on a lot of risk in hoping that you’ll pay the loan back. That’s why you’ll wind up with a higher interest rate.

On the other hand, the bank has some way to recover its losses if a borrower defaults on a collateral loan. The bank can seize the property. Since the bank takes on less risk, borrowers are rewarded with lower interest rates.

Collateral loans have declined over the years compared to other forms of debt, but they still play a valuable way for borrowers to access a large amount of funding.

How to Get a Collateral Loan

The process to get a collateral loan isn’t a whole lot different from getting an unsecured loan. You still have to have outstanding credit and you need to prove your income.

The first thing you want to do is to get your credit score. Your credit score is used to determine your risk and it’s a big factor in your interest rate.

The higher your credit score, the less risk you pose to the bank. That results in a lower interest rate. A few points can mean hundreds of dollars you pay in interest.

Know Your Loan Options

There are so many things to know when you’re shopping for a loan. You need to know the interest rates, the terms of the loan, and whether or not it’s a collateral loan.

What is a collateral loan? A collateral loan is a way to save money on a loan, but you use personal property to back the loan.

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