Lending Resource

Receive Personal Loans with Collateral

Secured personal loans also known as collateral loans reduce the risk for the lender to the borrower by requiring an asset prior to the loan. Whenever the borrower is unable to or neglects to give back the personal loan, the collateral that was offered initially will have a new owner. With the assurance of collateral, most collateral or secured loans will have a lower interest rate than unsecured loans. Our possessions hold personal value and importance, so it is good to know all the potential drawbacks towards getting a collateral loan.

Explanation of Different Collateral Loans

Anything that has value to the banks can be applied as collateral such as automobiles. These personal collateral loans are also known as car title loans or auto title loans. The value of the car is typically worth more than the actual loan amounts. This is a reassurance to the lender that they will get their money back. You will generally receive half of the value of the car.

Putting Your House Up For Collateral

Others may get personal loans with their house for collateral but there is an enormous caution before placing down the piece of estate or house. You could lose your home and property if you ever default with the lender. This would not be advocated for anyone who still uses their collateral as a home. You could end up losing your home for a value less than you expect.

Once you agree to the value of the collateral and borrow that amount, any changes in collateral value will have to be paid up by you. If a part of your estate was originally worth $50,000 and sank in value to $30,000, you would still have to pay back $20,000. The property is now only worth $30,000 to the bank. Since you borrowed $50,000, you would still have a $20,000 debt to the lender.

You lost your property because the value of the property sank. In order to keep the previous scenario from taking place, it is recommended not to borrow the whole value of the collateral. Only take up what you need and adhere to things that you are ready to part with just in case you do fail to repay the loan. Even if you just borrow what you require, remember that you will invariably end up paying more than the original total due to the interest rates.

If you have no collateral but hold a steady job, there might be other lending loans available to you. One such personal loan is a payday loan where you can get a portion of your paycheck upfront, provided you agree to give them your paycheck if you are unable to repay.

The Financial Risks Associated With Personal Loans

Lending is a large business in the United States. All told, consumer lending makes up a large portion of the lending industry, which explains why consumer debt levels are so high at over two trillion dollars as of June 7, 2010 according to the Federal Reserve. Since lending is essentially an exchange of debt, it would make sense for a significant portion of lending to result in a significant portion of debt.

While consumer debt is fairly large, the debt owed by the federal government is staggering. As of July 1, 2010, the federal government of the United States owes over thirteen trillion dollars, with eight trillion dollars being held by the public in the form of bonds, according to the Bureau of the Public Debt. This is a large number, but what a discussion of debt fails to take into account about lending is financial risk.

A good portion of consumer lending involves personal loans, which are loans designed to furnish borrowers with liquidity. As the name suggests, these loans are made directly to individuals on the basis of their credit worthiness.

What are Personal Loans?

Personal loans are usually unsecured, which means they do not have any collateral backing them up if the borrower defaults. The loan APR (annual percentage rate) offer amounts are generally determined by your ability to pay and the risk involved for the lender. If you are deemed a high risk candidate for a personal loan, expect a similarly high APR (interest) rate. This makes them risky to the lender, so they stringently check a prospective borrower’s credit history.

Personal loans are not risk-free. Since the lender is basically out of luck if the borrower defaults, they charge high interest rates in order to make up the risk. The interest rates on personal loans are still lower than those of some credit cards, however, which can make them attractive to borrowers.

The high interest rates are combined with a loan term that is fixed and usually non-negotiable. This can be a good thing or a bad thing, since it can make borrowers be prompt and timely in repaying their loan or it can result in the borrower panicking and deciding not to repay the loan if things get a little tight. Obviously the latter option is dangerous to lenders, which ironically is one of the reasons why the fixed loan term is instituted to begin with.

Personal loans are not without risks to both borrowers and lenders. This is why borrowers are counseled to only consider them if they know for certain that they will have the funds to repay the loan.