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Secured Loans

Understanding How to Use Collateral for a Secured Loan

It is important to be able to have access to loans when you need them. Sometimes you will need to provide a lender with collateral in order to receive the favorable loan terms that you are looking for – this is typical of secured loans. If you have yet to secure a loan with collateral, then you may not understand how the process works. There are specific things that will be accepted as collateral, and knowing what they are as well as the benefits are important.

Why is Collateral Necessary?

Collateral is necessary for loans when the lenders need assurances. Sometimes people with less than stellar credit will need access to loans. If the lender deems the loan to be risky, then having collateral in case something goes awry will limit their risks. This makes it easier for them to justify giving you the loan, and it can wind up giving you more favorable terms.

What Are the Benefits of Using Collateral for a Loan?

There are various benefits to using collateral to get a secured loan. The most apparent benefit is that it allows people with less than perfect credit to get the loans that they need. This can lower the interest rates of the loan and will also make the approval process go smoother. If you want to get a loan, and your credit score is less than 700, then it might be in your best interests to use collateral to make things as manageable as possible.

What Are the Negatives of Using Collateral for a Loan?

The negatives of using collateral for a secured loan are pretty easy to understand. You are using your assets to secure the loan, so if something goes wrong, you could potentially lose those assets. If your vehicle is being used as collateral to secure the loan, and you don’t pay it back, then your car could get repossessed. Also, sometimes these loans are long-term, and you can get stuck paying interest for a long period of time if you don’t plan ahead.

What is Accepted as Collateral?

The type of collateral that is accepted for a loan will depend on the type of loan that you are applying for. Generally speaking, there are three types of loans that you will be able to seek out – personal loans, business loans or commercial finance, and auto loans. Each of these three types has differences with the types of collateral that you can use to secure a loan.

Personal loans allow you to use real estate, home equity, vehicles, and even your paychecks as collateral for a loan. There are also cases where savings accounts, investment accounts, and valuables are accepted as collateral. The most common collateral that is used for these purposes is definitely real estate, vehicles, and home equity.

Business loans allow people to use similar things as collateral but will also add in a few options. You can use business assets such as inventory, machinery, or a blanket lien as collateral. Auto loans will allow you to use the car that you are purchasing as collateral, or other vehicles that you already own. No matter what type of loan you are applying for, the value of your assets will need to be determined before moving forward.

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Why are Specialist Lenders More Open to Lending Than Traditional Banks?

The last decade has seen the ‘rebirth’ of the specialist sector. The current specialist lenders are more conservative than in the past and are governed by tighter legislation such as increased capital requirements making them less vulnerable in the event of a downturn. There have been various reasons for this with more customers struggling to meet the strict lending criteria of high street banks. Specialist lenders are able to deal with more complex applications that would normally fall out the main stream lenders criteria for example, someone who doesn’t have a regular stream of income or has recently moved jobs or is purchasing a right to buy or shared ownership property.

Furthermore, self-employment and contracting are growing. Unusual income patterns have become common such as free lancers or people with varying incomes etc. Lenders who use credit scoring will often turn these clients away. Specialist lenders build themselves around specific customer groups and are therefore able to help these clients. Also, specialist lenders will help clients who have had a small blip in their credit history which can usually be easily explained, or due to personal circumstances such as bereavement or unemployment. These individuals are not repeat offenders and have a good history before and after such an event. Unfortunately, the main stream lender will not see it this way.

The main stream lender has shown no interest to win business that falls outside of their automated underwriting and which are designed to help the conventional borrower. This means that the margins for the specialist sector should remain higher or keep growing.

Richard Tugwell at Together says ‘in many ways the specialist market acts as a complement to the mainstream lenders and ensures that the customers have a choice. I think that the challenge for the specialist market is ensuring more consumers are aware of this offering and that’s something that the lenders and brokers need to work together on.’

Specialist lending is now more regulated and we should see less volatility than before as the focus is on affordability. This type of lending is set up to cater to complexity and not poor quality or irresponsible lending. Brokers who keep a closed mind to this sector are losing out on a big share of the growing specialist /sub prime sector.

Specialised lenders are more catered to adapting to changing criteria compared to the high street lenders. Main stream lenders take longer to change their criteria due to the legacy systems. Mainstream lenders need to adopt a manual underwriting approach instead of credit scoring. Brokers need to ask/determine what type of lender the client needs. Brokers need to do their own research to get an understanding of this market to take advantages of these opportunities so that they can help every single customer find the best solution for them whatever their circumstance.

Research has also suggested that people are not fully aware of the options available to them. As traditionally, the market has focused on mortgages for house purchases or cash. It is important that the buyers are made aware of all the options available to them in the market so that they can make informed choices.


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