What type of collateral is used for personal loans?

 
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Are you considering a personal loan to resolve a sudden financial emergency or pay for some other expense? You may already know that secured loans provide borrowers with many advantages over unsecured loans, but do you know what you can use to secure a loan?  There are a variety of things you can use as collateral, your car or savings account for example. Each one comes with its own pros and cons. Some of the major variables you’ll have to consider involve things like how much money you can borrow and how long it takes to get the money. Keep reading for an introduction to how to select the type of collateral to use for personal loans.

What are the Main Types of Collateral used for Personal Loans?

The type of collateral you use for a secured loan will depend a lot on what you are using the loan for. One thing that all secured loans have in common though, if you fail to pay your loan back you’ll likely lose your collateral. That’s why it’s important to shop around for a good deal that you’re sure you can afford. Some of the more common types of secured loans are:

  • Home Loan
  • Auto Loan
  • Savings-Secured Loan

What are the Different Types of Home Loans?

There are two main types of home loans that most people are familiar with. Both use your home as equity:

  • Mortgage: A mortgage is the type of loan used to purchase property, typically land or a home. You make a down payment and then pay the rest of the loan off, plus interest, fees, etc. over some span of time.
  • Home Equity Loan: A home equity loan let’s you borrow money against the equity in your home. Equity is the market value of your home minus what you owe on it. So, if your home was worth $100,000 and you still owed $40,000 on it, the equity would be $60,000. A home equity loan is structured in the same way as your original mortgage. You receive the money in a lump sum and pay the lender back a portion of the principal plus interest every month over the duration of the loan. In exchange, the lender has a right to a certain amount of value in the home, whatever you owe, in the event that you default and lose your home.

What are the Different Types of Auto Loans?

There are a few different types of auto loans you can apply for:

  • Auto Equity Loan: Auto equity loans are similar to home equity loans. You borrower a certain amount of money against the market value of your car, minus what you owe on it. As with a home equity loan, you won’t be able to borrow against the full value of your car, even if it’s entirely paid off. These loans are usually offered by community banks and federal credit unions, where the maximum interest rate is normally around 18%.
  • Auto Loan Refinancing: These make sense when interest rates drop and if you’re having trouble keeping up on your current loan. In a nutshell, the lender gives you a new loan with enough money to pay off your current loan, and potentially with some extra. You’ll get the benefit of having a lower interest rate. Plus, if the new loan exceeds the amount you originally owed, the lender will give you that excess money.
  • Auto Title Loans: Auto title loans use your car’s title, rather than the actual car, as collateral for you loan. In exchange for the lender putting a lien on your car title, they will give you a loan, usually with less downtime than other types of loans. Unlike many other types of loans, your credit score doesn’t usually have a major impact on your eligibility. You can continue to drive your car while you have a title loan, but they often have high interest rates and are meant for consumers facing a sudden financial emergency.

What is a Savings-Secured Loan?

You can secure a loan with something like a savings account or a CD, or even an investment portfolio sometimes. Typically, experts don’t recommend this as the interest on the loan will typically be more than the interest the account is earning. You’ll need to double check however, as accounts like CDs have a penalty for early withdrawal. Normally, when you secure a loan through a savings account, you cannot access the money for the duration of the loan. You might run into issues as well if it is an investment account and the value of the account falls, so be sure to check with your lender.

Now that you’re familiar with the how to select the type of collateral to use for a personal loan, you can make financial decisions with a little more confidence. Whatever you need a secured loan for, a financial emergency or something else, you now have an idea of what your options are in terms of picking something to use as collateral.

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2Based on consumers who received a loan from February 2002 to October 2018.

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