Are Collateral Loans a Good Idea?

Are collateral loans a good idea

When you don’t have the funds to meet an unexpected, major expense, what options come to mind first? Maxing out on your credit card? Or maybe borrowing from a payday lender? But these options aren’t exactly good for you, as they come with a high risk of putting you in a cycle of debts. There are other options however, that can work better for you without harming your credit. Collateral loans, for instance, are of the alternatives you should explore.

What are collateral loans?

Sometimes your financial history or credit score may not be adequate to qualify for an unsecured loan. Under such circumstances, collateral loans come to your rescue. Otherwise known as secured loans, these loans are those backed by your assets. As the name implies, in this case, you borrow money by pledging one of your assets as collateral.

Collateral loans are very common, although they may not sound so popular. This is because, there are other names used for these loans, such as mortgage loans, title loans, and auto loans.

Why Collateral Loans are good for you

Besides the fact that they provide you with the much-needed funds when you most need them, collateral loans also come with some significant advantages:

  1. They’re your best chance of getting approved. When you’re having a tough time getting loans due to poor or short credit, collateral loans make life easier. They come with a high likelihood of approval.
  2. You don’t have to pay high interest. Since this type of loan is backed by collateral, there is lesser risk involved for lenders. Hence, lenders like to give secured loans. And therefore, unlike unsecured loans, these loans come with lower interest rates.
  3. You get short-term liquidity. Your money may be tied up in assets such as a home or other valuables. In such cases, secured loans help you get money without having to sell any of your assets.
  4. You can qualify to borrow more. By offering up collateral you are reducing the lender’s risk. As a result, you may qualify to borrow much more than you would, without collateral.
  5. Collateral loans can help you build credit. You can fix your credit issues by taking out a collateral loan. If you put a collateral loan to good use and make timely payments, you will soon see a marked improvement in your credit score.   

The only risk associated with these loans is that, if you fail to make your payments you may lose the asset that you have set up as collateral. But irrespective of the type of loan, failing to make payments is likely to have adverse effects. So, do not shy away from collateral loans. They’re definitely a good idea, provided you’re confident about your ability to repay.