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In general, loans fall into two categories, secured or unsecured. You have to provide an asset as collateral for a secured loan, but you will also have more benefits available to you for the loan, such as a better interest rate and potentially even a larger loan amount. If you’re thinking of using collateral to secure a loan, it is important to understand what it is and how it works.
A secured loan involves promising an asset as collateral for the loan. In the event that you stop making payments, your lender can repossess the asset you put up as collateral, sell it, and then collect the money they are owed. Examples of secured loans are mortgages and car loans.
Any loan that does not involve collateral or promising an asset is an unsecured loan. Examples of unsecured loans are student debt and credit cards.
By providing collateral for a loan, you are making yourself a less risky candidate to the lender because they have an asset to sell as a back-up if you miss payments or default. The lender will want to ensure that they receive at least some of the lent money back, collateral ensures this is possible, hence why some lenders make collateral mandatory. Without the collateral, the lender could risk losing thousands of dollars, a risk they don’t want to take.
As with most things, what works for you might not be ideal for someone else. To determine if a secured loan or unsecured loan is better, you will have to consider and analyze your financial position.
Secured loans are ideal for individuals that have:
Usually, lenders have restrictions on assets or other collateral that can be used for specific loans for both individuals and businesses. Here are the three major types of loans, personal, vehicle, and business, as well as the most commonly used collateral for them.
Personal Loans
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Vehicle Loans
Business Loans
Here’s how to use assets secure funding for your business.
Often, lenders offer you less money than the value of the asset you’re using as collateral, generally between 50% and 90% of the total value. In some cases it can actually be lower depending on the creditor and the asset type. This means that the actual value of your asset won’t be used for the purposes of your loan. In the eyes of the lender, your asset isn’t as valuable as you may think.
As an example, if you use an investment portfolio as collateral, the lender may only offer 50% of the total value to factor in the potential variability of the investment. On the other hand, lenders tend to give you up to 80% of your house value if you use your home as collateral.
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Read this article to find out how you can get a car loan after a repossession.
Any loan that is not secured by collateral or an asset is considered to be an unsecured loan. Unsecured loans are actually quite common and the biggest benefit is you don’t put your valuable assets at risk. Typically, you can get an unsecured personal loan with good rates if you have any of the following: good credit, steady income from a full-time job, or a low debt to income ratio, 43% or lower to be specific.
Still interested in asset-based leasing and financing? If so, check this out.
Now that you know more about secured and unsecured loans, your next step is to apply for the loan you want. If you’re looking to apply for a loan, Loans Canada can help you apply for both secured and unsecured loans today.
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