What is Collateral and How is it used for Taking a Loan?

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collateral-loans

There are two types of loans that are classified on the basis of collateral – secured and unsecured loans. Unsecured loans do not require collateral or security, i.e. a pledge against the loan. In other words, there is no asset that can be repossessed by the lender in the case on non-repayment. Because of this high risk, such loans are based on good credit scores. The credit scores show the history of a person’s borrowings and the repayments. A good credit score means you have established that you repay loans on time.

A secured loan is one, wherein the borrower pledges an asset as security or collateral. So, what is collateral? In simple words, it is the asset which the borrower offers as a way for securing the loan. In the case of non-repayment, the lender can use the asset to recoup losses. For a secured loan, the value of the collateral must meet or exceed the value of the loan amount.

Collateral is something of cash value that can be pledged to a lender. This makes it less risky for a lender to forward the money.

Common kinds of Collateral

Loans and advances are fairly common in a market and certain assets are used as collateral.

  • Home equity
  • Real estate
  • Personal vehicle
  • Fine art, collectible or jewelry
  • Investment account
  • Business machinery or equipment
  • Farm products and assets
  • Paper investments
  • Business vehicle
  • Car equity

Worth of the Collateral

Lenders always value the collateral for its current market value before forwarding a loan. Most loans forwarded are less than the market value of the pledged asset. The pledges asset is valued by specialists who have knowledge of the asset and only then is the loan amount decided.

Car Title Loan

A car title loan is a kind of personal loan where you offer your car as security to get a loan quickly. The process for this is fairly fast which begins with one searching for best online lenders. The internet has made the application process hassle free and quick. There are zero credit checks and the lender will forward the funds once you make an application and pledge the title of your car. The only requirement is that you own your car completely. You can simply type cash for title near me in the search bar and visit page generate relevant results.

Car Equity Loan

Car equity is very similar to the car title loan, but you don’t have to be the complete owner of the car. You need to have equity in your car in order to avail this facility. Equity is the difference between the car value and the outstanding loan balance. If the current value of the car is more than the outstanding loan balance, it is positive equity. But if the outstanding amount is higher, then the equity is negative. So, if the current value of the car is $20,000 and the loan amount is $5,000, then $15,000 is the equity on the basis of which you can get a car loan.

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