Property Futures

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Creative Finance: Collateral Loans

Article: advantages and disadvantages of a collateral loan.

A collateral loan is one secured against an asset such as a house or car. The asset is the collateral. If the agreed repayments stop, the lender can seize the collateral to cover the debt.

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Loans can either be secured or unsecured. An unsecured loan is one that has no collateral – if the loan is not repaid, the borrower does not lose an asset.

Mortgages and car loans are the most common secured loans – the property or vehicle is collateral and can be foreclosed or repossessed if loan payments stop. Property that is claimed in this way is usually sold at auction, sometimes at a price lower than its market value as the lender is only interested in recouping their loss, not in getting the best price for the asset.

Using a property as collateral is a legal state, and the fact will be recorded in the articles of title. The lender’s claim is a lien, and may make it harder to sell the property.

 

Advantages of a collateral loan

  • Interest rates may be lower
  • May be easier to acquire than an unsecured loan
    • For example, for borrowers with a poor credit rating

Disadvantages of a collateral loan

  • If the loan is not repaid, the asset will be forfeit
    • For example, if you don’t repay a mortgage you will lose the property
  • May be harder to sell or transfer the collateral
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3 comments on “Creative Finance: Collateral Loans

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