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What is a collateral loan?

A collateral loan is secured loan that allows the borrower to pledge an asset for availing a loan. For this type of loan, the loan amount depends on the value of the collateral. This type of loan is relatively risk-free for the lender, as he has the option to liquidate the asset if in case the borrower defaults. As a result, borrowers can avail a higher loan amount at a lower interest rate than unsecured loans.

Advantages of collateral-based loans:

  • More Loan Options
  • Increased Chance of Qualifying
  • Lower Interest Rates
  • Better Payment Terms
  • Leverage for Negotiation

    What counts as collateral?

    You can secure a loan using any asset that has some kind of assigned value belonging to you or your business. This may include:

  • Your personal residence or business property
  • Inventory on hand, or items you intend to purchase using money from the loan
  • Personal or business savings
  • Money coming in from accounts receivable
  • The business itself (this type of collateral is known as a lien)

    When you put up collateral for a loan, you give the lender the right to take possession of whatever asset you offer in the event that the loan isn’t paid back. As per the terms of the loan, property may be claimed immediately if you default on your payments. The lender may then sell the collateral to cover the remaining loan payments.