If you’re in need of funds to cover an expense, like a car repair or home improvement project, a collateral loan might be a good option. This type of loan requires collateral, which is something valuable you own like a house or a car. Let’s take a closer look at what a collateral loan is and how you may benefit from one.
What is a collateral loan?
A collateral loan is secured to collateral or an asset that you own. Since collateral reduces a lender’s risk, a collateral loan is easier to qualify for than an unsecured loan, which doesn’t require collateral. A collateral loan may also come with a lower interest rate and more favorable terms. But keep in mind that if you default on a collateral loan, the lender can take possession of it and use the sale proceeds to repay the loan.
What is loan collateral?
Collateral is something that you pledge as security for the repayment of a loan. This means that if you default on your loan, the lender can seize the collateral to recoup their losses. There are many different types of collateral that can be used, such as your home, car, or cash. The value of the collateral must typically be equal to or greater than the amount of the loan.
How collateral loans work
When you apply for a collateral loan, the lender will ask you for details about the collateral you plan to offer up. They’ll also look at the collateral's fair market value to determine how much the collateral is worth. This information will give them an idea of how much money to lend you and what type of loan terms to offer.
Types of collateral loans
Here are some common types of collateral loans:
- Title loans: Title loans are collateral loans that let you use your car title as collateral. With these loans, the lender will typically offer you a loan amount worth 25 to 50% of your vehicle’s value.
- Mortgages: Mortgages are home loans that are backed by the home you’re financing. If you default on this collateral loan, the lender can foreclose on your property and sell it to recoup their losses.
- Home equity loans: Also known as second mortgages, home equity loans are tied to your home’s equity, which is the difference between the current value of your home and the amount you still owe on your mortgage.
- Vehicle loans: Vehicle loans are collateral loans you can use to purchase a vehicle. These loans are secured to the car, truck, boat, or motorcycle you bought. If you fail to pay back the loan, the lender has the right to repossess your vehicle.
Where can I get a collateral loan?
Fortunately, collateral loans like title loans, mortgages, home equity loans, and vehicle loans are common and offered by various lenders. You can find them at banks, credit unions, and online lenders.
Pros and cons of collateral loans
As with any financial product, collateral loans come with benefits and drawbacks, including:
Pro of collateral loans: Good credit not needed
Since collateral loans reduce a lender’s risk, you can get approved with fair or poor credit. As long as you have collateral and feel confident you’ll be able to repay your loan, a collateral loan is worth considering.
Pro of collateral loans: Lower interest rates
Compared to unsecured loans, which don’t require collateral, collateral loans usually come with lower interest rates. This can save you hundreds or even thousands of dollars over the life of your loan.
Pro of collateral loans: Potential to receive a larger loan amount
If you need to cover a significant expense, a collateral loan can provide you with a larger amount of funds. Lenders know they’ll be able to seize your collateral if you default, so they may be willing to lend you more money.
Con of collateral loans: You may not qualify if you don’t own the collateral
Collateral, like your house or car, is required for collateral loans. If you don’t own something of value, a collateral loan won’t be an option and you may need to choose an unsecured loan instead.
Con of collateral loans: You could lose your collateral
With a collateral loan, the lender has the right to take your asset if you default. That’s why you should only take one out if you know you’ll be able to make all your payments.
What you’ll need to apply for a loan with collateral
Before applying for a collateral loan, you should gather all the documents and information you’ll need in advance. Here’s what you’ll need to apply for a title loan from Advance America:
- Government issued ID
- Vehicle and title
- Proof of residence (utility bill)
- Proof of income, vehicle registration, and insurance may be required in some states
How can I get a collateral loan?
To apply for a title loan from Advance America, follow these simple steps.
- Fill out a collateral loan application: If you own a vehicle, you can apply for a title loan online within minutes, from the comfort of your own home.
- Visit an Advance America location: Once you submit your title loan application, you can bring your vehicle to a nearby Advance America location to get it appraised.
- Wait for a collateral loan offer: Once Advance America appraises your vehicle, they’ll offer you a loan amount. This amount will be based on the value of your vehicle.
- Receive your collateral loan funds: If approved for a title loan, you may receive your funds the same day you apply. You can continue driving your car as you pay back this collateral loan.
Benefits of collateral loans from Advance America
Here are a few perks Advance America title loans offer:
You can fill out a quick and straightforward application for this collateral loan online from the comfort of home. All you have to do is share some basic personal information and details about your vehicle, like its year, make, model, trim, and mileage.
As soon as your application has been reviewed and your paperwork has been finalized, you’ll likely get approved quickly and receive the loan the same day you apply or within 24 hours. You won’t have to wait weeks or months for the funds.
Keep driving your car as you repay the collateral loan
You’ll be able to keep driving your vehicle as you pay back your collateral loan. There’s no need to invest in a rental car or find an alternative form of transportation.
Alternatives to collateral loans
If you don’t want to risk losing an item as collateral, here are some alternative loan options to consider:
Installment loans are short-term, unsecured loans that give the borrower a lump sum of money upfront. With these loans, you’ll pay back what you owe in fixed monthly payments, or installments.
With payday loans, you can receive a few hundred dollars to tide you over until your next payday. You’ll typically repay this small-dollar, unsecured loan in two to four weeks, when you receive your paycheck.
Lines of credit
A line of credit is a flexible loan that lets you draw on funds as needed, up to your set credit limit. You can repay what you owe all at once or over time, and you’ll only pay interest on the amount you borrow.
Get a collateral loan from Advance America
Advance America title loans are a great way to get the funds you need fast. You can fill out an application online or at an Advance America store location near you. If approved for this collateral loan, you can get the cash you need right away and drive your car as you pay back the loan. Learn more about our title loans by visiting Advance America today.