Maximizing Collateral for Business and Personal Loans

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What is Collateral?

If you’ve ever applied for a loan, you’ve probably had the option to take a secured or unsecured loan. You may have also noticed that secured loans have significantly lower rates than unsecured ones. That’s all due to collateral.

Collateral can be any asset that a borrower offers up as security for a loan. Offering an asset as collateral allows the lender to collect that asset if the borrower defaults on that loan. It’s often used as a way for lenders to minimize risk to themselves.
There are a large variety of items that can be used as collateral; however, the most common ones include homes, cars, business property, and income.

Ultimately, the type of loan and value of the loan determine what kinds of collateral you can offer up.

Types of Collateral.

Any loan that requires collateral is considered a secured loan – while everything else is considered an unsecured loan. Secured loans are available for anything from mortgages to equipment loans.

With large personal loans, the item being loaned – such as a home for a mortgage or car for a car loan – are the collateral. Smaller personal loans (such as a secured credit card or payday loan) are often collateralized with valuable possessions, cash deposits, or investment accounts (excluding retirement accounts). Most secured personal loans will require that the collateral meet or exceed the value of the loan.

Business or commercial secured loans typically have stricter requirements for collateral. Like with larger personal loans, secured business loans will almost always collateralize any equipment or property purchased with the funds from the loan. Unlike with larger personal loans, secured business loans often require you offer up more items for collateral if other parts of your application (such as your credit or time in business) aren’t up to their standards.

Some common items used as collateral are:
• Cash
• Car
• Boat
• Home
• Stocks
• Inventory
• Real estate
• Equipment

Benefits of Secured Loans.

With good collateral, lenders are more likely to offer larger loans with lower interest rates and better terms. Lenders want to make sure they’re able to earn a profit off loans – which makes collateral attractive to them. Because of this, they’re much more likely to offer more favorable loans to borrowers who can offer valuable collateral.

Cons of Secured Loans.

Any loan comes with risk for both parties. Lenders risk financial loss if the borrower defaults while the borrower risks their credit. Secured loans add an extra risk for the borrower by also putting their asset on the table.

How to get the Best Rates with Secured Loans.

The value you get out of your secured loan ultimately depends on the value you can put in. If you or your business has a good cash flow and/or great credit, it’s likely you won’t need to offer up a lot of collateral to get good rates. On the other hand, if your loan application isn’t so stellar, you’ll probably need to put some important assets up for collateral to make up the difference or even qualify.

When it comes to maximizing your collateral with business loans, you should try to hit a good loan-to-value ratio. Essentially, your loan-to-value ratio is how much a lender is willing to loan you based on the value of the assets you put up as collateral. Lenders usually offer loans up to 70% – 80% of the value of your collateral.

You can start maximizing the value of your collateral by understanding which assets your lenders prefer. Some lenders prefer safer or more tangible assets like real estate and may value them more than other assets.

Other lenders may prefer other assets like inventory or stocks. Lenders that specialize in your industry are much more likely to value assets that businesses in that industry normally have.

Maximizing the value of your collateral for personal loans is typically more straightforward. Most secured personal loans only require you put up the asset being loaned to you as collateral. If your personal loan requires different collateral, any asset of high value that’s easily convertible to cash will usually suffice.

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