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What are Collateral Personal Loans?

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Collateral personal loans are another name for secured loans. These are loans in which the borrower puts up collateral, or property, in addition to his pledge to repay a loan.

What's the Advantage of Collateral Personal Loans?

  • Makes loan approval more likely. If an unsecured personal loan is uncertain, relying only on the credit and employment history of the borrower, the addition of collateral can help the borrower's cause. A lender will feel more comfortable with any loan transaction that involves collateral because the property adds some insurance to the situation. If the borrower defaults on the loan, the lender can still take ownership of the collateral, which often is a vehicle, property.
  • Helps to lower cost of the loan. There's a simple relationship that explains when lenders are willing to reduce the cost of loans. The more risk involved, the higher the cost of the loan. The less risk involved, the lower the interest rate and any fees associated with the loan. Collateral personal loans help to lower the risk for the lender, meaning a lower overall cost for the borrower.

Collateral Personal Loans are Risky for the Borrower

Most financial experts suggest that people seeking loans only offer collateral if it is an absolute requirement. Let's say you have applied for a personal loan for $25,000 and realize you can save a couple of percentage points on the cost of the loan - maybe $40 a month - if you go with a secured loan using collateral. While it's always a good idea to save money when possible, the collateral personal loan fails the risk-reward analysis. The reward is a lower monthly payment on a loan. The risk is that something unforeseen will happen down the road that will make it impossible to continue paying on the loan. Assume the collateral was a vehicle that the borrower uses to get to work and is the primary vehicle for a family. The risk of losing that vehicle isn't worth the reward of saving $40 each month on a loan.

When to Use Collateral Personal Loans

If the need for a personal loan is great and the lender has already turned you down or indicated that's what will happen, then the collateral should be used only to make sure the loan goes through. That ensures the borrower gets the money that's needed to handle whatever financial emergency sparked the crisis in the first place. It's a difficult choice, but in this case, the secured loan passes the risk-reward analysis because using the collateral takes care of a financial emergency.

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