Collateral Loans: The Good and the Bad

You desperately want to renovate your outdated, impractical kitchen. Your roof is leaking and needs replacing—now. You’re job hunting and keen to upgrade your resume by taking an expensive (but beneficial) upskilling course.

Collateral loans (also called secured loans) are types of loans where you offer up ownership of a large asset—like a new model car or a home—to the lender in exchange for borrowing money from them.

They have obvious benefits, such as lower limits to accessibility, higher lending sums, and lower interest rates. Still, you also risk losing your property if you can’t make the repayments.

There’s a lot to consider before taking out a collateral loan. Read on to find out when a secured loan can be helpful and why it can sometimes be a bad idea.

Benefits of Collateral Loans

Collateral loans have many pluses for the right kind of lender. However, you must be willing to assume much of the risk in the lending equation.

You Don’t Need Perfect Credit

One of the most attractive features of secured loans is that you can still apply if you have a poor credit history.

All you need is valuable property, like a house or a car, to put up in exchange for the lender lending you an agreed-upon sum of money. For example, you can read more on using a new model car to secure a fast cash loan at

You Can Borrow Higher Sums of Money

Since you’re backing up the lending agreement with an asset, lenders are usually willing to hand over far higher sums of money than they would in an unsecured loan. That’s because you, rather than the lender, assume the risk.

You’ll Get a Lower Interest Rate

One of the many benefits of a collateral loan is that you can usually get a much lower interest rate. A lower APR will allow you to pay the loan off quicker and reduce the amount of money you lose in interest.

You’ll get the best interest rate if you have:

  • Consistent income

  • Good credit history

  • A high-priced asset

Problems With Collateral Loans

Collateral loans can be great for those who can pay them off. However, beware if you’re using them in desperate situations.

Approval Can Take a Long Time

The application process for personal loans with collateral is sometimes complicated. This is because a lender needs to determine the value of your asset before they approve the loan. Depending on the type of collateral, this can take some time.

You Can Lose Your Property

To get a secured loan in the first place, you need to put up collateral. And it’s here that the risk lies for the lender.

If you lose your job, have serious health issues, or experience a myriad of other emergencies and can’t make your repayments, you risk losing your home, car, or whatever you used as collateral.

Understand the Terms Before Signing on the Dotted Line

Secured or collateral loans can be beneficial when you need quick liquidity.

So long as you own a valuable asset, this type of loan is easier to get approved for, and you can access more significant sums of money than you’d get with an unsecured loan. However, the borrower assumes most of the risk in this lending contract since you agree to hand over ownership of your property if you fail to make payments.

For more fast financial advice, browse the other informative articles on our website.