- What Is a Collateral Loan?
- How to Get a Collateral Loan with Bad Credit
- Repaying the Loan
- How Do Collateral Loans Work?
- Types of Collateral Loans
Collateral loans are secured loans where the borrower puts up an asset like a car or house as collateral. For those with bad credit or limited credit history, collateral loans may be a good option. If you’re unfamiliar with the lending landscape, finding collateral loans near you can be difficult.
It’s important to understand the different types of collateral loans and their requirements if you need one. Some lenders require a minimum income or credit score, while others are more flexible. Depending on the lender and collateral value, loan amount, interest rates, and terms can vary widely.
This article discusses collateral loans, how to find local lenders, and how to get the best loan terms. Understanding collateral loans and how to find them can help you make smart financial decisions and get the financing you need.
What Is a Collateral Loan?
Collateral loans are types of loans in which the borrower provides the lender with collateral in exchange for a loan. The collateral can be any asset of value, including your home, jewelry, or vehicle. Some lenders even accept bonds and stocks as collateral.
The lenders will hold onto the collateral as security for the loan for the duration of the loan or until the loan is paid off in full, whichever comes first. However, it’s important to note that the lender also has the right to seize the assets if the borrower fails to keep up with monthly installments and defaults on the loan.
Unlike unsecured loans, which use your credit score and credit history to establish eligibility, collateral loans aren’t reliant on your credit report. Instead, the collateral reduces the lender’s risk of losing money if you default. As a result, collateral loans often offer lower interest rates and more favorable loan terms than unsecured loans.
Since collateral loans aren’t reliant on the borrower’s credit report, they’re often used by borrowers with poor credit or limited credit history. The loan amount is derived from the value of the collateral, usually 40% of the collateral’s value.
For example, if you’re obtaining a car title loan from 5 Star Car Title Loans, the company will assess the car’s value and determine the maximum value you can borrow against the car’s value. The loan terms will depend on the lender’s specific requirements and your ability to repay the loan.
Collateral loans can be used for various purposes, including debt consolidation, home improvements, and unexpected expenses. However, borrowers should be aware of the risks associated with collateral loans, such as the potential loss of the collateral if they miss monthly payments.
Before agreeing to the loan, as with any other personal loan, carefully review the terms and conditions to ensure that it is a good fit for your financial situation.
How to Get a Collateral Loan with Bad Credit
If you have bad credit, getting a collateral loan can be challenging, but not impossible. The application process is actually pretty straightforward, though specific requirements vary from one lender to another.
However, before we list the specific steps for getting a collateral loan with bad credit, let’s discuss a few things you should probably do beforehand. For example, it’s always a good idea to check and review your credit report yourself and dispute any errors and discrepancies that might be adversely affecting your credit score.
Despite most lenders claiming their loans don’t require credit checks, most of them actually do. However, those credit checks are actually soft credit checks that don’t adversely affect your credit score in any way.
Additionally, your credit report isn’t used to determine eligibility, as is the case with unsecured personal loans. Instead, your credit score determines the appropriate interest rates and loan terms. That’s why it’s important to address any discrepancies in your credit report; higher scores usually obtain more competitive rates and more favorable repayment terms.
Another sound piece of advice is to gather all the necessary documents and paperwork needed for your loan application and approval. This can expedite the loan application and approval process, leading to quicker funding. Now, let’s dive into the steps for how to get a collateral loan.
Step 1: Apply for the Loan
Depending on the financial institution of your choosing, you can apply for a loan in one of three ways, either by phone, online or in person. 5 Star Car Title Loans, just like the majority of online lenders nowadays, allow you to pre-apply and prequalify for a car title loan by filling out an application form found on the company’s website.
To apply for prequalification on a loan, head over to the 5 Star Car Title Loans website and fill out the application form. Online applications are rather convenient as they can be filled out from the comfort of your home on your personal device.
You’ll need to provide the lender with some basic information, such as your name, date of birth, address, phone number, and other personal information. Since we’re discussing a car title loan, you’ll also have to provide the vehicle’s make, model, and year.
Step 2: Provide the Necessary Documents
Once you apply for prequalification, the lender will do a soft credit check. This check won’t have any adverse effects on your credit score, and it isn’t a vital factor in determining your loan eligibility.
Once the lender’s loan specialist reviews your applications, they’ll give you conditional approval. This means that you’re one step closer to obtaining a loan from your chosen lender.
Upon giving conditional approval, the loan agent will require that you submit the necessary documents to further check your eligibility for containing the loan. Having these documents prepared can significantly speed up the process:
- State-issued ID — In order for lenders to verify your identity and determine whether you’re legally able to enter the contract, you must provide the lender with an official, state-issued identification document. A driver’s license, a passport, or a photo ID should suffice.
- Proof of Residency — To ensure that you are residing in the state in which the loan is being granted and that the loan complies with all state laws and regulations, lenders require proof of residence. Anything with your name and address on it, like utility bills or lease agreements, will do.
- Proof of Income — The majority of lenders (though not all) require proof of your income, demonstrating your capacity to pay back the loan. This includes any paperwork that demonstrates you have a consistent source of income, such as bank statements, pay stubs, tax returns, and pension statements. Some lenders grant loans with no income verification.
- Lien-free Car Title — Car title loans use the title to your car as collateral; however, you must present the lender with a qualifying title in place of the car itself. Lenders are reassured by a lien-free car title that they alone would be entitled to your vehicle in the event of a loan default.
- Proof of Vehicle Insurance — Some online lenders require you to provide proof of insurance as evidence that your vehicle is road-legal, safe to operate, and registered in the state where the loan is being processed. In order to avoid any potential legal issues with the loan, the latter is extremely important.
- Photos of the Vehicle — Some lenders may require you to submit photos of your car taken from all angles so they can evaluate it without sending a representative to see it in person. A small number of businesses will ask for both the photos and the physical inspection of the vehicle, while other businesses will only accept physical inspections.
In most cases, you’ll have to deliver the necessary documentation to the local branch office. However, some lenders allow applicants to send in their documents via mail, courier services, or even email. Once all the documents are reviewed and the loan has been approved, the loan agent will contact you with an offer based on the information assessed from the documents you provided.
Get Your Loan
The loan offer consists of the proposed loan amount and loan terms. If you find the loan offer acceptable, signing the contract is pretty simple. You’ll need to provide the lender with your banking account, either a savings account or a checking account, so that the lender can deposit loan funds.
In case you don’t have an active banking account, the lender will provide you with a MoneyGram Reference Number so that you can access your funds at any MoneyGram location. Online lenders typically deposit the loan funds within 24 hours after approval or on the next business day.
Repaying the Loan
Now that you’ve received the funds, you should focus on loan payments. One of the many benefits associated with auto loans offered by 5 Star Car Title Loans is that you get to keep driving your case during the life of the loan.
Since you’re not actually depositing the vehicle as collateral but rather its title, you can keep driving your car for as long as you’re making timely payments on your installments. However, if you default on the loan, the lender has the right to seize your vehicle as damages.
Usually, when you default on a secured personal loan, most lenders will provide you with a grace period, during which you can repay your loan in full as a lump sum. If you fail to repay the loan, the lender will seize the collateral and auction it off to cover its losses.
If the accrued debt overshadows the value of the collateral, the lender may take you to court for compensation or even send your debt to collections. Both instances will have a severe impact on your credit score.
That’s why 5 Star Car Title Loans encourages borrowers to repay their loans on time and soon as possible. The company doesn’t impose any prepayment penalties on borrowers who repay their loans ahead of schedule. In fact, doing so could benefit your credit score.
Most lenders will notify the credit bureau of your timely payment, which will have a positive impact on your credit score. This will grant you access to better loan options, with much more favorable loan rates, annual percentage rates, and loan terms for future loans.
If you struggle to maintain monthly installment payments, don’t hesitate to discuss it with your lender. In most cases, the lender will offer to refinance your loan, usually offering more affordable installments. However, refinancing your loan incurred high-interest rates.
How Do Collateral Loans Work?
Collateral loans work just like other types of secured personal loans. You provide the lender with collateral in exchange for the loan, and since the loan is repaid, the lender will return the collateral.
Since you can’t actually deposit your vehicle when taking out a car title loan, you’re providing the lender with a qualifying title to the vehicle. This way, you can continue to drive your car for the duration of the loan as long as you make your installment payments on time.
Once the loan is repaid, the lender will return the collateral. In the case of car title loans, the lien placed on the title by the lender will be lifted.
Types of Collateral Loans
Collateral loans are synonymous with secured loans, a category of loans that are secured with an asset, thus reducing the lender’s risk of losing money in case you don’t repay. This category of loans actually encapsulates several different types of loans, all of which are mentioned below:
- Car Title Loans — Auto loans are loans in which the vehicle serves as collateral. However, instead of giving a car to your lender (which assumes you still need your car for personal use), you provide the lender with the car’s title. This way, you can continue to drive your car.
- Home Equity Line of Credit — Also known as HELOCs, or second mortgages, home equity loans are secured by the equity you have in your home. Usually, the lenders require that you own at least 15% of your home, and the loan amount can’t exceed the value of your equity.
- Pawnshop Loans — These loans are secured by items of value that you leave with the pawnbroker in exchange for the loan. The pawnbroker will typically lend you a percentage of the item’s value and keep the item as collateral until you repay the loan.
- Bridge Loans — Bridge loans are short-term loans used to bridge the gap between two larger financial transactions, such as real estate sales and acquisitions. They’re typically secured by the property being sold or the one being purchased.
However, it’s important to mention that not all loans require collateral. Unsecured loans, such as credit cards and personal lines of credit, don’t require collateral but are often associated with minimum loan amounts, higher interest rates, and origination fees, and almost always imply credit checks to establish your creditworthiness.
Here are some of the most frequently asked questions regarding collateral loans:
Q: Where can you get a collateral loan?
A: Both traditional (banks and credit unions) and non-traditional (online) lenders offer collateral loans. However, non-traditional lenders are more willing to offer their services to individuals with poor or outright bad credit and limited credit history.
Q: What kind of loan can I get with collateral?
A: It actually depends on collateral. Mortgages and home equity loans rely on real property, car title loans rely on vehicle titles, and pawn lenders might use stocks, bonds, account receivables, jewelry, art, and other valuable items.
Q: Can I get a loan with bad credit if I have collateral?
A: Yes, online lenders offer collateral loans to individuals with bad credit. Please remember to personally check your credit score and rectify any discrepancies before actually applying for a loan. Rectifying discrepancies can help you secure a loan with more favorable loan terms and payment options.
Q: How much collateral is needed for a loan?
A: The amount of collateral needed for a loan depends on several factors, such as the lender’s requirements, loan type, creditworthiness, and the value of the collateral. As much as the value of collateral dictates the loan amount, the loan amount can also dictate the required value of the collateral.
Q: What are the four types of collateral?
A: There are four basic types of collateral, including real property, the land and any structure built on it; personal property, including cars, boats, jewelry, stocks, and bonds; accounts receivable, which is basically securing a loan with a debt owed to you by a third party; and cash savings, which include savings accounts, certificates of deposit, and money market accounts.
Q: Are collateral loans risky?
A: Only if you intend on not paying the loan. The two biggest risks associated with collateral loans are loss of collateral in case of a default, and the depreciation of collateral, in which case you’ll have to provide additional collateral or pay the difference required to maintain the collateral-to-loan ratio.