Get a Collateral Loan

A collateral loan is also called a “secured loan.” With this type of loan, you pledge assets to back up the loan, which the lender can seize if you default. Since the lender has security, they are more likely to give larger loans with a lower interest rate over a longer period. Collateral loans are an option when you want lower interest rates for a large loan, have poor credit, or are considering cutting debt costs.

Steps

Identifying Possible Collateral

1. Pledge your car as collateral. If you own your car outright, then you can get an auto equity loan. Generally, you can borrow 100% of your car’s value, though this amount will differ depending on your credit history.
   • If you haven’t paid off your car loan, then the car is currently serving as collateral for that loan.
   • However, you might have paid off some of your loan. In that situation, you can get a new loan for a higher amount, using the car as collateral.
2. Use your home as collateral. There are a couple types of secured loans you can get using your home as collateral, and there are many lenders willing to make these loans. Consider the following types:
   • Home equity loan. You get a loan for a fixed sum of money and repay it in equal monthly installments. If you don’t repay per your agreement, the lender can foreclose. Generally, you can get a loan equal to 85% of the equity in your home.
   • Home equity line of credit. A HELOC operates like a credit card. You borrow as much as you need, up to the limit set by your lender, and make payments on the amount you borrow. Typically, you can borrow up to 85% of the equity in your home. If you default, your lender can seize your home.
3. Offer your savings account as collateral. Some banks extend loans to customers who have a savings account with them. Because the account secures the loan, you generally can’t access the account until you pay the loan back.
   • You can also use a certificate of deposit as collateral for a bank loan.
4. Pledge personal property as collateral. You can get a secured loan using all kinds of assets as collateral. Consider any personal property that has value and which you own, such as the following:
   • watercraft
   • motorcycles
   • equipment
   • furniture
   • computer
5. Pledge stocks and other investments as collateral. If you have investments with a private bank or investment broker, then they may lend you money using your accounts as collateral. Often, you can get a loan up to the full amount of your account.
6. Use future paychecks as collateral. Some banks will give you a “cash advance loan” or “salary advance loan” backed up by your future paychecks. Generally, these are short-term loans due when you receive your next check.
   • Many lenders offer legitimate salary-advance loans. Don’t confuse these with “payday” loans, which have sky high interest rates and are illegal in many states.
   • Payday lenders tend to operate out of storefront offices, like pawn shops. By contrast, banks and credit unions offer salary-advance loans.
7. Pledge business assets as collateral. Businesses can use many assets to secure a loan for their business. For example, a client might issue a large purchase order. To fulfill the order, you need to hire staff or make other investments. Banks will often lend against your assets, such as accounts receivable or inventory.

Finding Secured Loans

1. Check with banks. Banks make secured personal and business loans. If you already do business with a bank, then stop in and ask about how you can apply for a secured loan.
   • Generally, you need better credit to get a loan from a bank. You can contact the bank’s lending department and ask if your credit score will qualify you.
2. Visit a credit union. Credit unions are a great option if you don’t qualify for a bank loan. Credit unions often give loans to people with credit histories that are less than stellar. You can find a credit union by visiting here: https://www.mycreditunion.gov/pages/mcu-map.aspx.
3. Research online lenders. Online lending is a growing field, and there’s usually an online lender willing to lend to just about anyone. However, you need to do thorough research because there are some shady businesses out there.
   • Only apply with a lender whose website is secure. The website URL should read “https,” not “http.”
   • Reputable lenders will look at your credit history. Avoid anyone who claims not to care about your credit history.
   • Avoid any lender that requires access to your bank account. Reputable lenders should accept a variety of payment methods, not simply electronic transfers.
   • Check out any complaints at the Better Business Bureau. You can also check the Consumer Financial Protection Bureau’s complaints database.

Applying for the Loan

1. Review your credit history. Your ability to get a loan will depend on your credit history, including your credit score, overall indebtedness, and your income. You should obtain a free copy of your credit report and review it for errors. Dispute anything that is inaccurate.
   • Get your free copy by calling 1-877-322-8228 or visiting http://www.annualcreditreport.com. You’ll need to provide your name, address, date of birth, and Social Security Number.
   • Common errors include accounts with the wrong balance or limit listed, or accounts inaccurately reported as delinquent or closed.
2. Calculate what you can afford. If you default on your loan, your credit history will take a hit. Also, you’ll lose the collateral you pledged. Accordingly, calculate what you can afford for a loan payment each month.
   • You may need to create a budget to determine how much you can comfortably borrow. Calculate your fixed expenses, such as your rent or mortgage, and then see how much you can reduce other expenses, such as entertainment or travel expenses.
   • Avoid borrowing too much. Because you likely will receive a lower interest rate on a secured loan, you might be tempted to borrow more than you need. Don’t.
3. Contact lenders. Get the process started by contacting lenders and asking for a secured loan. Tell them the amount you want and what you are willing to pledge as collateral. Ask them about the application process and any timelines.
   • Find out what collateral they accept. Lenders aren’t required to accept collateral, so you should check whether or not they will accept what you have to offer. If not, talk about what else you might be able to pledge.
4. Complete your application. Each application will differ depending on the lender. However, you generally will be asked for similar information. You can complete some applications online, while other lenders will require a paper application. Provide the following information:
   • Social Security information
   • personal information, including address
   • income information
   • employment information
   • information for a co-borrower
   • information about your collateral
5. Await the results. The lender will review your application and decide whether or not to extend a loan. The length of this process will depend on the lender. If you have questions, call the loan officer you have been working with.
6. Compare loans. You need to comparison shop by looking at the terms offered by many different lenders. Remember, you haven’t taken out the loan until you sign for it. Compare the following:
   • APR. The annual percentage rate is the interest rate you will pay on the loan. It also might include other charges, such as credit charges. Typically, the lower the APR, the less expensive the loan.
   • Length of the loan repayment. The longer you have to pay back the loan, the less you will pay each month. However, you will pay more in total.
   • Monthly payment amount.
   • Prepayment penalties. Some lenders charge extra fees if you pay off a loan early. Try to find a lender who doesn’t charge these penalties.
7. Review the documents before signing. Ask the lender if you can get copies of all the documents you need to sign. You’ll want sufficient time to review everything. Make sure you understand all conditions before signing.
   • If you don’t understand what you are reading, then contact an attorney to help you.
   • At closing, remember to review the documents to make sure nothing has changed since you were approved for the loan. In fact, you should ask the lender officer if anything has changed.

Cancelling a Home Equity Loan

1. Identify the deadline for cancelling. Generally, most home equity borrowers get at least three business days from closing to cancel their loan. Business days include Saturdays but not Sundays or public holidays. Depending on your circumstances, you may have more time (possibly up to three years).
   • The clock starts ticking the day you sign the contract, receive a Truth in Lending disclosure, and get a Truth in Lending notice that explains your right to cancel.
   • If you’ve missed the deadline, consult with an attorney. You may have additional rights under your state’s laws.
2. Write a letter to cancel. You can’t cancel in person or over the telephone. Instead, you must send the lender a letter. Don’t delay. You must mail the letter before midnight of the third business day.
   • Mail the letter certified mail, return receipt requested so you will know when it has been received.
   • Also hold onto all correspondence with your lender.
3. Receive a release of the security interest. Your lender has 20 days after you cancel to release the security interest in your home. The lender also must return any money or property you paid as part of the transaction.
   • You also must return the lender’s money. Once you receive a release of your security interest, you must offer to return the creditor’s property or money.
4. Complain to the authorities about unfair practices. Contact your state’s Attorney General’s Office or banking regulatory office if you think the lender used deceptive or unfair practices. Be prepared to provide evidence to back up your assertions.

Tips

• Avoid any lender who tells you not to read the terms of the loan or who encourages you to lie on your loan application.

Sources and Citations

See also

• Assume a Car Loan
• Pay Off Student Loans with a Mortgage
• Apply For a Fannie Mae Loan
• Calculate How Much House You Can Afford
• Get Payday Loans With Bad Credit
• Get a Home Improvement Loan
• Pay Your Mortgage With a Credit Card
• Refinance Student Loans
• Get a Home Equity Loan
• Calculate Mortgage Payments

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