Collateral Based Loans
Collateral is something that helps secure a loan. When you borrow money, you agree that your lender can take something of value and sell it to get their money back if you fail to repay the loan. Collateral makes it probable to get large loans, and it improves your odds of getting approved if you’re having a hard time receiving a loan.
When you pledge collateral, the lender takes less risk, which implies you’re more likely to get a decent rate.
In rare cases, you get the loan, buy an asset, and then pledge it immediately; just like a lender would work with an insurance underwriter (for insurance cases) to provide the policy & collateral based loan at a go. the same applies for a mortgage; the house is collateral, and therefore the lender has the right to shut you out if you default repayment.
There also are collateral loans for those with dangerous credit. However, these loans are expensive and may be your last resort. Plus, they ought to be handled with caution; failure to repay could result in serious consequences; just like the lender could take an asset and sell it.
How Collateral Works
We finance strictly on collateral and not credit. Here is how we loan on equipment values:
USED Equipment: up to 75% of forced liquidation value
NEW Equipment: up to 80% of cost
Collateral is usually needed once the lender needs some assurance that they won’t lose all of their cash. If you pledge an asset as collateral, your lender has the right to take action (assuming you stop making payments on the loan): they take possession of the collateral, sell it, and use the sales proceeds to pay off the loan.
Any asset that your lender accepts as collateral (and that is allowed by law) can serve as collateral. In general, lenders like assets that are easy to value and switch into cash. For example, money in a bank account is great for collateral: lenders know how much it’s worth and it is simple to collect.
What can be used for Collateral
Some common forms of collateral include:
- Real estate (including equity in your home)
- Cash accounts (retirement accounts typically don’t qualify, although there are always exceptions)
- Machinery and equipment
- Insurance policies
- Valuables and collectibles
- Future payments from customers (receivables)
Even if you are obtaining a business loan, you might pledge your personal assets (like your family home) as part of a personal guarantee.
We just need an application and equipment list to work with!
How to Value your Asset
Typically, lenders offer an amount less than the value of the asset you pledge. Some assets might be heavily discounted. For example, a lender may choose to take only 50% of your investment portfolio for use as collateral. By doing so, they boost their chances of getting back all their money in the event investments lose their value.
During loan applications, lenders quote a tolerable LTV (loan to value ratio). A lender may put the LTV at 70%, so if you pledge an asset that’s worth $100,000, they allow you to borrow a max of $80,000.