Using the Right Collateral for a Loan


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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.

Defining Collateral

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 sell it.

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 failed.

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 as collateral.

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 resale.

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 website.


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