Many financial institutions lend money on the basis of collateral. Your collateral, such as a home, car or deposit account, represents a security interest; the lender knows that if you cannot repay the loan that the collateral can help recoup some or all of the difference. Traditional banks are only one of the places to obtain a collateral-backed loan, however. Your specific credit profile can direct you to the lender best suited to fill your borrowing needs.
Traditional banks like Wells Fargo offer secured loans. In addition to the option of using your home for an equity loan, traditional banks often accept vehicles as collateral. Remember that you must have the title to the car to qualify, although some banks will accept a relative's titled vehicle provided that individual co-signs on the loan.
If you have a savings account or certificate of deposit at a bank, the bank may be able to use it for collateral. Remember two things, however, if you explore this route. First, just having a deposit account does not guarantee loan approval since you will still have to pass a credit check. Second, if you are granted a deposit-backed loan, the bank will place a "hold" on the funds. This means you will not be able to withdraw them or renegotiate the deposit rate until the loan is repaid.
Credit unions offer an alternative to traditional banks. If you are already a credit union member, that institution may be able to offer you a lower rate than a bank, a major advantage. Pennsylvania State Employees Credit Union (PSECU), for example, is owned by its members, not stockholders. The nonprofit operation thus allows for lower margins on loans.
Even if you don't belong to a credit union, you may be eligible to join. For instance, PSECU reminds potential borrowers that although the credit union started as public employees-only, now many other people are eligible to join. Keep in mind that credit union membership does not guarantee you'll be lent money. Your collateral must be acceptable and you must pass a credit check first.
The last resort for many borrowers in the consumer finance company. Finance companies traditionally charge considerably higher rates of interest to customers with weaker credit profiles. Although the finance company may ask for collateral, they may not require it; many finance companies also will accept your older model car or mobile home as collateral, items that more conservative lenders often refuse.
You will almost certainly pay a higher interest rate if you use a consumer finance unit for your loan. Although your collateral may knock off a few points of interest as compared to an unsecured loan, it is common as of 2009 to see finance company loan rates in the high teens and even mid-20-point range. This is at least six times higher than the current prime interest rate.
Remember to ask about fees, too. Finance companies like CitiFinancial typically charge processing fees for loans, plus late charges for tardy payments. "Precomputed interest" is also a hallmark of finance company loans. If you pay off the loan early, you won't recoup much savings since the finance charge is predetermined. For all these reasons, a finance company loan should be your last choice, after all other institution options have been exhausted.
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