When applying for a loan in the bank, it is notoriously difficult to meet the extensive standards of the lending qualifications. In almost every case, the bank will insist that the lender takes out a collateral, to avoid any inconveniences.
Collaterals are used to support your application and assure the lenders that your case is at low-risk of becoming an issue that could affect them financially. If your loan is deemed risky by a lender, collateral will provide assurance that they will be covered in case any issues arise during the process.
Using collateral to get a secured loan has many benefits, most obvious being that it allows people with less than stellar credit scores to apply for a loan, lowering the interest rates and increasing the chances of approval. If you are looking to get a loan and your credit score is less than 700, it is recommended to consider a collateral to eliminate any risks of rejection.
The downsides to collateral, however, are worth considering. When signing up to collateral, you are putting your assets at risk, as they are acting at a security to hold the loan. This means that if you fail to pay the loan, your possessions can be taken from your ownership.
The probability of the loan being accepted depends mostly on the type of loan; personal, business or commercial finance. With personal loans, you are able to use your property as collateral, home equity, vehicles or even pay checks. In some cases, savings accounts, valuables and investments can be used as collateral for your loan.
For a business, it is possible to use inventory or machinery to apply, however, no matter what type of loan you are applying for, it is always necessary to establish the value of your assets first.
The advance rate varies depending on the type of loan that you are applying for and of course, the asset. If you are using cash savings or a bank deposit, it is almost certain that there will be an advance by at least 95% as there is a low risk for the bank. While the terms are favourable, the disadvantage is that the bank has full control of becoming on possession of the money. This means that if you are a business using cash as collateral, it’s very unlikely for you to be able to spend it.
As the lenders are holding tight standards of lending approvals, collateral is increasing in popularity as the general public are struggling to adapt to the qualifications set by the banks.