Collateral Loans: What Are They & How Do They Work?

08 Aug 2021

A collateral loan is a type of loan where something of value is used as a guarantee or insurance to secure a loan. Collateral loans can also be referred to as secured loans. When using an asset to qualify for a loan, the lender has the right to take the pledged collateral, and sell it to try to recoup funds in the event that the loan is not repaid. Because an asset of value is given as collateral, loans of this type generally mean that it's easier to get a larger loan, and may also improve your chances of loan approval if you have bad credit.

How Do Secured Loans Against A Car Work?

It is possible to offer up any cars or vehicles you own as collateral for a secured personal loan. In fact, loans using cars as collateral are common in Australia, as cars often represent one of the most valuable assets someone can own. When using your car as collateral, there are a few things to keep in mind.

The value and condition of your car may affect your ability to use it as collateral
You need to be the owner of the car if you wish to offer it as collateral
You need to have sufficient equity in the car to use it as an asset for a secured loan.

Offering your car up as collateral for a secured loan also comes with risks. If you are unable to pay back your loan in time, it may mean that your car is taken from you to recoup finances. This could leave you without transport, and put yourself and your family in a difficult position. Considering this, only use your car as collateral if you're sure you can pay back your loan on time.

Why Get A Loan Against Your Car?

If you have a poor credit score, or have had trouble getting a loan in the past, getting a loan against your car may be a good option for you. Providing your car as collateral gives the lender security when financing your loan, which could mean you qualify for more money when applying. If you do have bad credit, it may still be possible to get a loan without collateral. Sunshine Loans offer loans for bad credit, where instead of using your credit score, bank statements are used to assess your ability to afford repayments.

Types of Collateral

In addition to your vehicle, there are many other assets that can be used as collateral when applying for a secured loan. These can include a mix of both "hard" assets like property, or "paper" collateral, which can be anything that has the potential to earn money in the future, such as shares. Some other examples of assets you can consider using when applying for a secured loan include:

Property
Machinery or equipment
Valuables and collectables
Investments like shares, bonds, and mutual funds
Future paycheques or purchase orders
Savings accounts.

Cross Collateral Loans

Cross collateral loans or "cross collateralization" is a method used by lenders that use the collateral of one loan, such as a car, to secure another loan.For example, if you have offered up your car as collateral for a secured personal loan, but also have credit card debt with that same lender, even if you finish paying off your personal loan, your car may still be used by the lender as collateral for your other debt. This means that your original asset may be withheld from you until all your loans are repaid. This can cause issues, because it may keep you from being able to sell or have full rights over the assets you use as collateral. It is best to always check with your lender about any cross-collateral methods they might use.

Getting A Loan Without Collateral

Sunshine loans offer a range of personal loan options geared to suit a host of individual situations. Even if you have bad credit, it may still be possible to qualify for a loan without having to use collateral. Contact our friendly team today to find out more about your personal loan options with Sunshine Loans.

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