Using the Right Collateral for a Loan
Written by: John Mussi
Loans can be expensive, and if you're not careful you might find
yourself paying much more in interest than you have to. Of
course, there are a lot of factors that are used to determine
your interest rate... your credit score, national interest
rates, and some of these other factors that are for the most
part beyond your control.
However, there is one factor that not only can have a
significant effect on the amount of interest that you pay but is
also directly under your control.
By taking the time to choose the right collateral to secure your
loan, you can save both time and money while repaying the loan
and help to make sure that you get the loan in the first place.
Before you can choose the right collateral to secure your loan,
it's important that you know exactly what collateral is and what
it is used for. Collateral is an object of value that is used to
guarantee repayment of a secured loan. The item used as
collateral provides security to the lender, letting them know
that they'll get their money back whether or not you're able to
satisfactorily repay the loan... if you fail to make the proper
payments, then the lender has a legal claim to the property used
as collateral and can take possession of it with the intent to
The repossession process does create additional cost and labor
for the lender, however, and is generally used only as a last
resort after other collection attempts have been attempted and
Deciding on the Type of Loan
The type of loan that you're applying for can have a major
effect on the type of collateral that you use. Certain types of
loans require specific collateral, and others use the item
purchased with the loan itself as the collateral. Take the time
to consider what the loan is going to be used for and how much
money you're going to need to borrow. If you're making a
high-value purchase, such as a house or new vehicle, you'll
probably be better off using a specialized finance or mortgage
loan that uses the item as the collateral.
If you're consolidating debt or making home improvements that
will have a significant cost, you might want to think about
applying for a home equity loan.
If you're going to apply for another type of loan, then you need
to start thinking about what you have available that you can use
Considering Available Collateral
Most items of value can be used as collateral to secure a loan,
but not all of them are appropriate for most loans. Some lenders
require that you use certain types of collateral, but even for
those that don't you might find that certain types of collateral
aren't going to get you a good interest rate for your loan. Take
the time to consider the various items that you could possibly
use as collateral, keeping in mind that it needs to be an item
of value that has at least a somewhat accessible market for
Remember that property with a higher value tends to make better
collateral than lesser-valued items, which is one of the reasons
that houses, vehicles, precious metals, and home equity are
commonly used as collateral.
Carefully evaluate the potential collateral that you have
available before making your decision, and remember that it's
perfectly acceptable to request loan rate quotes from lenders
before choosing one loan or piece of collateral over the others.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
About the author:
John Mussi is the founder of Direct Online Loans who help
homeowners find the best available loans via the www.directonlineloans.
Return to Home