What can I use as collateral for a secured loan?

What can I use as collateral for a secured loan?

At Free Price Compare, you can find out how to use collateral for a personal loan. You may have heard that you can use your house or car as collateral, but first of all, what is collateral? Collateral is something pledged as security for repayment of a loan, which is to be forfeited in the event of non payment. Here we are talking about collateral meaning an asset that you own, in full or in part, that can be used to demonstrate that a lender is not at risk of losing money by giving you a loan.

Now let’s consider the benefits of using collateral or security for a loan, compared to unsecured loans. The advantages can be broken down into five main areas:

1- Greater loan availability

You will have far greater choice in the market if you consider a collateral loan secured against one of your assets. Your lender will consider you less of a risk if you are willing to put up something that has a lot of value to you as security, and that lower risk is the key to having more options. A wider variety of lenders will be willing to consider you which increases the chances of you finding a loan that suits your needs and circumstances. By offering security, you are more likely to find a lender willing to loan you money.

2- Fewer credit score restrictions

Even with lower credit scores, more lenders will consider you as they have their route to repayment secured. Lenders will typically still check your credit score and history, but even a poor credit file showing accounts in arrears, CCJs or defaults won’t necessarily prevent you from borrowing money if you are using collateral. As long as the value of the asset being used as collateral can be demonstrated, there will be less restrictive rules in place when it comes to lenders offering you a personal loan.

3- More flexibility around employment status

Often self employed or unemployed borrowers can have a hard time finding a lender who will consider them. Even those in secure employment can struggle if they have not been in their current job that long. Offering collateral security can significantly open up your options for a loan, as lenders will be less restrictive in terms of your employment status. This is especially relevant considering that the loss of a job may be a trigger for seeking a personal loan in the first place.

4- Higher loan amount

Typically, loans are capped based on a borrower’s circumstances and credit score, reflecting the risk of an unsecured loan to the lender. When offering up collateral, you will open up the opportunity to borrow higher amounts as the maximum loan amount will be proportionate to the asset being held as security. It is worth considering that the amount you can borrow will be capped, for example, at 50% of your asset’s value. This is for the lender to improve their chances of getting their money back in full in the event that the asset loses its value or its value was over stated to begin with.

5- Lower interest rates

The interest rate that you will be offered on a collateral loan will usually be lower than that of traditional loans. Lenders are willing to offer lower rates as they are much lower risk than with unsecured loans. It is far less likely for them to make a loss if there is security in place so there will be less need to charge high interest on the loan balance. Interest rates are linked to the perceived risk of a loan and offering collateral reduces that risk to the lender. When considering interest rates, it is also important to know the difference between fixed and variable rates. Fixed rates do not change over the life of the loan, so you know how much you’re paying back every month. Variable interest rates are linked to the interest rate set by the Bank of England which means that your monthly payments could go up and down as the rates move, which can cause problems if you only have a small financial buffer each month.

Types of collateral

There are a variety of things that can be used for a secured collateral loan, but the most common you will hear about are your house or your car.

Secured loan with house as collateral

If you take out loans secured using your home as collateral, you have access to all the benefits mentioned above and depending on your home’s value and your equity in the house, you could be able to borrow significantly more than when considering unsecured personal loans. Consider collateral security for home loan very carefully, as it is really important that you understand the implications of using your home as security in this way. The lender will take out a charge on your property to secure its route to repayment. That means that if you don’t keep up with your repayments, the lender can apply for a court order to sell your home so they can recoup any money they are owed, leaving you homeless as a worst case scenario.

Secured personal loan using car as collateral

Using your car as collateral is another common option when taking out a security loan. Unless we’re talking about supercars, though, your car will be worth less than a property, and its value will determine how much you can borrow. However, it’s not only cars that can be used, it’s good to remember that lots of different vehicles can be used as collateral, depending on the lender, such as motorcycles, vans, trucks or even boats. Obviously, this is a less risky option than using your home, but if you depend heavily on your vehicle for your livelihood, for example, the risk of losing it could still be devastating.

Your savings and investments

Money in a savings account can also be used as collateral. “Why not use the money in savings instead of taking out a loan?” we hear you ask. If your savings are tied up in a long-term account that you can’t access, or if you have got a particularly good interest rate, it may be worthwhile borrowing money separately and use the savings as security. In less common scenarios, your investment and stock portfolio can also be used as collateral for a personal loan.

Important factors to consider

When looking for a secured loan, you will have lots of lenders vying for your custom, but remember it is still important to shop around to get the best deal. You may have a good and longstanding relationship with your bank, but there are many other specialist lenders to consider who may be able to give you a better deal when considering your needs in terms of length of repayment and interest rate.

It’s also important to consider the worst case scenario, as once you have put any asset as collateral, it is at risk for the duration of the loan. If you can’t or don’t repay, the lender can seize your asset, whether it’s your home, vehicle, savings or investments at stake. Ask yourself “what will happen if I lose this asset?”, and consider if there are any other more favourable options.

Alternatives to a secured loan when trying to repay existing debts

Using your savings – if the interest rate you’re getting on your savings is less than interest charged on borrowing, which is most often the case, you will be better off repaying your debts first. It can be nice to have a cash fund sitting there for emergencies but try and look at the bigger picture and long term effect on your finances. Once your credit cards are paid off they can still be kept for emergencies. Hopefully, there won’t be any need, but if there is, you will be no worse off than when you started. Instead, you will have saved on interest costs in the meantime.

Consider doing a balance transfer – if your debt is on credit cards, you may be able to reduce your interest repayments by transferring your balance to another credit provider. Look for a 0% interest rate for the longest period of time to give you flexibility in how long you have to repay the balance, but be wary of using your new card for additional purchases, as these will often attract a higher interest rate than your balance transfer.

Request an interest rate cut – if you can’t do any of the above, you can contact your credit card provider to request a lower interest rate, it can work, and even the smallest reduction will help. The worst that can happen is that they will say no!

Unsecured loans – lastly, consider an unsecured loan if you can get one. They are less risky as you won’t lose an asset in the event of not being able to repay your loan.

Alternatives to a secured loan when trying to cover increased outgoings

Strict budgeting – this can reduce outgoings which can give you breathing space when contending with other costs that you can’t control.

Unsecured personal loans – as above, they can be cheaper and less risky for those who meet the eligibility criteria. Also, be sure to shop around as there may be a lender out there who will approve you without having to offer collateral, even if your circumstances are less than ideal.

Remortgage – if you own your own home or have enough equity, you may be able to remortgage to release some of that equity which can avoid the need to put up security for a separate loan.

Seeking advice – when things get too much

According to debt charity StepChange, “over four million people in Great Britain struggling to keep up with bills and credit repayments have recently borrowed to make ends meet”. Over half of GB adults (53%) have reported that they would be reluctant to seek help with financial difficulty from a bank or credit firm, which is “due to low trust in firms to act in their interest, worries about credit reporting and embarrassment and stigma talking about financial difficulty” – StepChange report. [1]

For further information about managing your money, or if you are in debt and need help, StepChange are offer free advice online 24 hours a day, 365 days a year.

Please visit www.stepchange.org to find out more. StepChange can also be contacted via phone on 0800 138 1111 and lines are open Monday to Friday 8am to 8pm and Saturday 8am to 4pm.

For general money advice, the government organisation Money Advice Service, can be visited at https://www.moneyadviceservice.org.uk/en.html for free and impartial information on managing your finances.

References

• [1]www.actuarialpost.co.uk