A loan with collateral — also called a secured loan — requires the borrower to pledge a valuable item they own to secure the loan. The collateral is there in case the borrower defaults. If they default, the lender can seize the collateral and sell it to recoup some or all of their losses. This reduces the lender’s risk. As a result, lenders can offer you several benefits if you get a secured loan. Below are five reasons to consider getting a loan with collateral:
1. You can get a larger loan amount
Lenders may let you borrow more money when you get a secured loan since they have less risk. The amount is based partially on the collateral’s value. So, you could use a more valuable item as collateral to get an even larger loan.
2. You can get a lower interest rate
One of the top benefits of loans with collateral is the lower interest rate. A lower rate can help you get a smaller monthly payment, making the loan easier to budget for. Plus, this can save you hundreds to thousands on interest over the life of the loan.
3. Credit score requirements are less strict
Using collateral to get a loan can help you get approved with a lower credit score. In fact, many types of secured loans come with less strict credit score requirements, and some don’t check your credit at all. So, these loans can potentially be great ways for people with poor or no credit to build or repair their credit history.
For example, poor-credit title loans let car owners use their title as collateral for a loan if they own their car outright and have a lien-free title. In addition to your credit score, the lender will use the car’s appraised value and your income to offer you a loan amount and terms.
4. Some secured loans won’t affect your credit score
Continuing from the previous point, secured loans that don’t check your credit score most likely won’t impact your credit score either. For example, a pawn shop loan has no credit checks. As a result, your credit score won’t take damage from a hard inquiry. Plus, if you fail to pay back that loan, you’ll lose your item, but your credit score won’t be damaged.
5. You can get a larger loan term
Using collateral to get a loan may help you get approved for a longer term length. Spreading a loan out over a longer term helps you get a lower monthly payment, holding loan amount and interest equal.
Consider a secured loan
Secured loans have plenty of upsides. They allow you to get larger loan amounts, lower interest rates, and longer loan terms. Credit score requirements are less strict, and some don’t even check your credit — making them great for some borrowers with poor or no credit.
Ultimately, many borrowers can benefit from secured loans if they use them responsibly. Budgeting for the loan amount and repaying it on time will help you take advantage of these benefits without losing your property.
Link to “Bad-Credit Title Loans” article.