Creative Finance: Collateral Loans | Property Futures

Article: advantages and disadvantages of a collateral loan.

A collateral loan is one secured against an asset such as a house or car. The asset is the collateral. If the agreed repayments stop, the lender can seize the collateral to cover the debt.

Loans can either be secured or unsecured. An unsecured loan is one that has no collateral ? if the loan is not repaid, the borrower does not lose an asset.

Mortgages and car loans are the most common secured loans ? the property or vehicle is collateral and can be foreclosed or repossessed if loan payments stop. Property that is claimed in this way is usually sold at auction, sometimes at a price lower than its market value as the lender is only interested in recouping their loss, not in getting the best price for the asset.

Using a property as collateral is a legal state, and the fact will be recorded in the articles of title. The lender?s claim is a lien, and may make it harder to sell the property.

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Advantages of a collateral loan

• Interest rates may be lower
• May be easier to acquire than an unsecured loan
  • For example, for borrowers with a poor credit rating

Disadvantages of a collateral loan

• If the loan is not repaid, the asset will be forfeit
  • For example, if you don?t repay a mortgage you will lose the property
• May be harder to sell or transfer the collateral

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Source: http://propertyfutures.wordpress.com/2013/05/08/creative-finance-collateral-loans/

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