Collateralized Loans: Here’s How They Benefit Consumers

Are you in need of cash, but don’t want to deal with high interest rates or the red-tape of traditional lending that can take too long to clear?

Collateral-based lending may be the route you want. It allows borrowers faster access to cash while offering the lender more security in the loan itself.

Ready to learn more? Read on for details on collateral-based lending and its benefits.

Defining collateralized loans

Collateralization involves tapping an asset, or item of value, in order to secure the loan. A lender may seize or keep the asset of a borrower defaults, or neglects to pay back, the loan. This gives the lender some security in offering the cash to the borrower and a fall-back plan, should it be needed, to regain the value of what they lent out.

Collateral-based loans aren’t just good for the lender, however. Because collateralized loans come with a guarantee — the item being used as collateral — the interest rates tend to be lower for the borrower than unsecured loans.

Collateralized loans also aid borrowers in obtaining loans if their credit is poor or lower than average.

Examples of collateralized loans

Perhaps the two most common forms of collateralization are home mortgages and car loans. While the borrower still owes money on either item, the lender has the power to reclaim the property — giving the borrower incentive to continue to pay as agreed upon.

Collateralization is also common for securing business loans. In this situation, business owners may offer equipment, stock, property or bonds as a guarantee for a loan that may be needed to improve parts of the business or to expand it.

Pawning as a collateralized loan

A pawn shop offers collateral-based loans to its borrowers. In this case, the loan is secured with an item of value to the borrower. The borrower is then given cash for the item, as a loan, and the borrower can buy back the item after the loan is paid back. The amount loaned out is usually a small fraction of the item’s value.

This arrangement allows those who need cash quickly to receive it and in exchange the lender — which is the pawnbroker in this case — has a guarantee of receiving the loan and interest rate back. There is typically no credit check involved in this process. The item of value itself is the securing component of the transaction.

It is important to note that pawn shops, though considered less traditional than a bank, are legitimate ways to take out collateralized loans. Pawn shops are regulated by 14 federal statutes and regulations, in addition to a variety of state and local laws. Checking with the Better Business Bureau is another way to ensure that the pawn shop chosen has a solid record with its customers.

Important points in collateral loans

There are a variety of collateralized loans available to consumers and businesses and they can benefit the borrower greatly. Remember that:

  • Collateralization provides a lender with security against default on a loan.
  • The interest rates on collateralized loans are substantially lower than unsecured loans.
  • Pawn shops offer collateral-based lending that are contingent on the value of the item presented.

It’s important to keep in mind the pros and cons to all types of lending and consider your options before deciding on which is right for you and your current need.

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