Personal loan rates can be pretty high. A “signature loan” can charge as much in interest as a credit card does, if not more. You’ll also find that, in many cases, it can be a challenge to get a personal loan at all. Many folks, unless their credit rating is in one of the highest categories, just don’t qualify for personal loans that are unsecured.
Fortunately, you may have an option. You can get what’s known as a “secured” personal loan by putting up something that you own as collateral.
There are several ways to do this. For example, you might have a vehicle that you own which is paid off. You can use that vehicle as collateral on your personal loan. Depending on your credit rating, you may be able to get a loan for the full market value of the vehicle or even more.
The same is true for your home. You may be able to get a loan based on the equity in your home. These kinds of personal loans are sometimes called “home equity loans,” and are another great option if you qualify for them.
These loans differ from, let’s say, a traditional car loan or a traditional mortgage. You’re not using the borrowed money to purchase a car or a house. You’re using the borrowed money for another purpose, whether it’s to pay off higher-interest debt, help pay for a child’s college education or wedding, or even just to take a Caribbean cruise.
Advantages to Using Collateral
There are a number of significant advantages to taking out this kind of a personal loan as opposed to one that doesn’t use collateral.
One of the biggest advantages, of course, is the interest rate. You’re going to get a much better interest rate when you have collateral than when you don’t. This is especially important when you’re using the personal loan to pay off higher-interest debt, as you want to replace that high rate with a rate as low as you can get.
Another advantage is in qualifying for the loan. It’s easier to qualify for a loan when you put something of value behind the loan beyond just your word.
Disadvantage to Using Collateral
There is a potential downside to taking a personal loan using collateral. If you can’t pay the loan, the bank has the right to take your property. Obviously, you want to make sure you have the means to make your loan payments to avoid this kind of scenario from developing.
Photo via Bruce Tuten