How to Get a Collateral Loan

Collateral Loans Involve Pledging Assets as Security

Personal unsecured loans are available from most banks and credit unions. Since they are unsecured they typically have a rather high interest rates, only slightly less than credit cards. If you offer security and turn an unsecured loan into a collateral loan, you'll enjoy a much lower interest rate. In addition, if you have credit report challenges, applying for a collateral loan greatly improves your chances for approval. Here is how to get a collateral loan.

Things You'll Need

• Assets
• Acceptable credit report

Instructions

Get a Collateral Loan

1. Determine the amount of money you need. You should have a solid idea of the amount of loan you need before proceeding further. Asking for too little or too much money from a lender may cause problems when you want a collateral loan.

2. Estimate the value of the collateral you are able to offer a lender as security for your loan request. You need to establish a feasible connection between the value of your collateral and the amount of money you wish to borrow.

3. Locate a lender that has reasonable policies for making collateral loans. For example, assume you have an auto with a fair market value (FMV) of $10,000 and you need to borrow $10,000. One lender may require dollar-for-dollar security for collateral loans. In this case, you can offer collateral equal to the amount you need. But, another lender may have a policy that values collateral at only 50 percent of FMV. In this instance, you are only able to offer 50 percent security for your loan request. You risk qualifying for a lesser amount or even rejection with this lender.

4. Be prepared to sign a loan note that includes a security agreement. Once you find an acceptable match--a lender willing to loan the amount you need in return for the value of the collateral you offer--your loan note language will express your pledge of the security you own. The lender will have the right to repossess or recover the asset (car, boat or motor home) should you default on the terms of the loan. The security agreement gives them that right and identifies the specific collateral you have pledged. If you pledge common stock or precious gems, your lender will probably want to take possession of the collateral.

5. Have legal language added to your title document. If your collateral is "titled," like an auto, boat or motor home, your lender will add legal language to the title document indicating that it has a lien on the collateral. This serves two purposes. First, you will be unable to sell or transfer title to the collateral without the lender's approval, usually given only after the loan is paid off. Second, should a covered loss occur, the insurance company claim check will be issued in both your name and the name of your lender. Both signatures are needed to execute (deposit or cash) the check.

6. Contact the lender to retrieve your title as soon as you've paid off your loan. Ask it to release its lien by signing the area for this action on the title document. Your collateral is now free to be traded or sold, should you so desire.

Tips & Warnings

• If your collateral is not an auto or similar asset, get a valid appraisal of its value. For example, if you're offering a diamond or other precious gem, get a gemologist appraisal. Should you want to pledge common stock as collateral, be prepared to offer securities valued at roughly twice the amount of the loan you want. Lenders need some protection against loss of value in the market.

• Don't offer any collateral that you might have plans to sell or transfer during the potential term of the loan. Avoid paying interest rates comparable to unsecured loans unless your credit report has made uncollateralized borrowing impossible.

References

• How a Collateral Loan Works