Life is busy, messy, and unpredictable. Just when you finally pay off your student loan, medical bills, or credit cards, you suddenly find yourself in need of extra cash. Leveraging personal assets to take out a collateral loan is one way to secure extra money.
What Is a Collateral Loan?
Before we dive into the definition of a collateral loan, let’s break it down into two words. The word “collateral” refers to something of value that you own. This can be property or an asset, such as jewelry, coins, electronics, firearms, cars, or musical instruments. The word “loan” means to borrow with the intention of returning or repaying.
A collateral loan is one type of loan. Borrowers pledge collateral in exchange for money. Borrowers also agree to repay that money so they can regain possession of the collateral. This type of loan can also is also known as a secured loan because the loan is secured by an asset you own.
When you, the borrower, take out a collateral loan, you hand over your asset in exchange for cash. The amount of cash you receive depends on the value of the asset. The more money the item is worth, the more money the lender will give you for the exchange.
You and the lender must agree on a date the full payment is due. When you borrow from a pawnshop, payment is often due in a short amount of time, such as 120 days. During this time, interest accumulates at a prearranged rate, such as 10% per month. Once the loan and interest are fully paid, you get your collateral back. If the loan is not paid back in the allotted time, the lender has the right to keep, sell, and earn money on your collateral.
A collateral loan is a great way to get a small amount of cash fast, especially if you plan on repaying it in a short amount of time. When you take out a collateral loan, make sure you understand the terms of your contract.
How to Get a Collateral Loan
Are you curious about how to obtain a collateral loan? Here is a short list of steps you can follow to secure a collateral loan:
- Determine how much money you need. If you plan on taking out a collateral loan for something in particular, for example to pay off a bill, you should know the exact amount of money you need. If you borrow an excessive amount, you’ll end up paying interest on money you didn’t need in the first place.
- Decide what asset you will use as collateral. Make a list of things you own that are worth roughly the same amount of cash you need. This list may include jewelry, electronics, instruments, or other items you own.
- Compare loans. Visit several pawnshops or similar businesses that offer collateral loans. See which of your items is worth the amount of cash you need. You will also need to figure out what each vendor is willing to pay in exchange for your collateral, what the interest rate is, and when payment is due. Ask if you can pay off your loan early and what happens if you miss a payment.
- Calculate your monthly payment. Take all the information you gathered in step three and calculate the monthly payment each vendor requires.
- Select a lender. After comparing vendors and calculating monthly loan payments, determine which lender is right for you. The ideal lender will give you the most amount of money for your collateral with the lowest interest rate.
Secured loans are less risky than unsecured loans, and they are a fast way to get spendable cash. Follow the steps above to take advantage of lower interest rates and secure a collateral loan.