3 Tips When Taking Out A Collateral Loan

If you're in need of a substantial sum of money and you have valuable assets, you may want to consider a collateral loan. These loans, also known as secured loans, allow you to leverage your possessions in exchange for their estimated cash value. As with any kind of financing strategy, however, intelligence and forethought are critical. Here are three useful tips to help you make wise decisions about your collateral loan.

1. Compare Rates and Terms

One of the most attractive aspects of collateral loans is the fact that you can usually get a lower interest rate, a larger loan amount, and more attractive repayment terms than you could get from an unsecured loan. When you put up collateral, you're assuming the risk instead of the lender. Since the lender has less to lose, that agency is freer to offer less restrictive conditions -- after all, if you default on the loan, the lender will still have the value of whatever you put up as collateral.

That said, you'll still find that the rates and terms for collateral loans in your area vary widely from lender to lender. If you're applying for a loan with terms that extend for more than 60 days, then your repayment will be tied to an annual percentage rate, or APR. Look for a loan that offers a fixed rate you know you can afford, instead of a variable one that might jump up to unmanageable heights in the near future. 

2. Clean Up Your Credit (Even if You Don't Have to)

Collateral loans are extremely useful for individuals who do not have a particularly strong or well-established credit rating. The tangible value of the jewelry or other possessions you put up will go a long way toward relieving lenders' worries in this regard. While you might not get a loan if your bankruptcy just went into effect or you never made an on-time payment in your life, you probably won't have to worry about achieving a specific credit score either.

Even so, it makes good sense to do what you can to optimize your credit record before you take out any kind of loan, even a collateral loan. Why not qualify for the lowest possible interest rate or the highest possible amount? Your lender might even agree to lend you more than the collateral is worth -- up to 125 percent, in some cases -- based on your clean credit history or high score. You should at least take the time to correct any errors in your credit record that might count against you.

3. Put Up Something You Can Bear to Part With

Secured loans can take many forms, and people have put up all kinds of valuable assets to obtain them. In a home equity loan, your house may serve as the collateral. People often put up their cars as collateral on secured loans. If you take out a student loan, you're putting up a major asset that you don't even have yet -- your future earnings, which can be garnished if you default on the terms of the loan. But think carefully before literally betting the farm, and ask yourself whether you can manage without the asset in question just in case a reversal made it impossible for your to make your payments.

A smarter strategy is to offer collateral that is valuable but not essential to your survival. Jewelry, artwork, home entertainment systems, and possibly second vehicles can all help you fetch handsome loan amounts without turning you out of house and home or limiting your ability to make a living.

Doing your homework, brushing up your credibility, and using collateral that you can afford to lose will all help you get a collateral loan you can live with and profit from. For more information, contact a local loan company like Sol's Jewelry & Loan