If you’re short on cash, you may have been tempted by taking out a personal loan. They can be an absolute life saver, helping with everything from medical expenses to consolidating your credit card debts. 

But before you sign the dotted line, make sure you do your research (reading this is a great start!).

If you’ve already read our article on personal loans, then you’re already ahead of the game. If you haven’t, here’s the short version of the story. A personal loan is a lump sum of cash that a bank or other lender can give you for a short-term period of time. Loans are usually under seven years, and can be for as high as 18%.

The length of your loan and the interest rate are generally decided by how much you’re trying to borrow and how good your credit is. No matter what, though, you can help your case out by offering collateral.

What Is Collateral?

Collateral is any personal property that you own that you can offer up to balance against your loan amount. And loans with collateral attached are called secured loans. That’s because the lender is “secured” by having your property as collateral.

Let’s use an example. Let’s say you inherited a nice classic car from a relative. It’s worth good money, but it also has sentimental value. Then, one day you fall and break your right leg, your favorite leg. You need money to cover your medical expenses and time off work.

Well, you don’t want to sell the car, because it has emotional meaning to you. So you go to a bank, you prove that you own the car, and they give you a loan for some portion of the value of the car. Then you take the money, and pay off the monthly payment on the loan. If for any reason you default on that loan, the bank comes and takes the car.

What Can I Use As Collateral?

Anything that’s worth money. Really. Trick is, it has to be worth more money than you’re trying to borrow. Generally speaking, the most common collateral is a house. Really, that’s all a mortgage is. 

Other common forms of collateral are cars (again), boats, precious coins, stocks, or even whole life insurance. Any property that’s worth money and can be transferred can be used as collateral, provided the lender agrees.

What’s the Real Benefit of a Loan with Collateral?

That’s in the eye of the beholder, really. Every loan will look different. Interest rates change every week, and so can our credit scores. How much you could save taking a secured loan, with collateral, really depends on your credit score, how much you’re borrowing, and how much your collateral is worth.

And no matter what, whatever you offer as collateral, you’re risking losing it.

The bottom line is that borrowing money is serious business, and while collateral can help your terms, it can also mean losing that property.

About the author 

Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

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