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What are the Pros and Cons of Collateral Loans?

By Rhonda Rivera
Updated May 16, 2024
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Collateral loans, also known as secured loans, have advantages and disadvantages. Some advantages of taking out a collateral loan are that it is often easy and quickly approved, and the borrower can usually request more money than he or she could with an unsecured loan. When taking out such a loan, however, the property used as collateral is at risk if the borrower cannot fully pay back the loan in the amount of time given. Another con of collateral loans is that they are not available to just anyone. If the potential borrower does not own a house, vehicle, or other piece of property routinely used as collateral, he or she cannot take out a collateral loan.

Due to the nature of collateral loans, there is little risk to the lender. If a borrower cannot or refuses to pay back the loaned amount, the lender essentially owns the borrower’s property. With this in mind, lenders are usually quick to approve loans, even if the borrower does not have a pristine credit history. More often than not, people that are turned down for unsecured loans can get a secured loan because there is so much less risk to the lender. While this is a definite advantage over unsecured loans, it is up to the borrower to determine if the risk of taking out collateral loans is worth taking.

Depending on equity and affordability, people using collateral loans can usually borrow large sums of money, while unsecured loans are capped much lower. With unsecured loans, a lender assesses a potential borrower’s income and caps the loan amount at a point before the risk is too much. Collateral loans do not have this problem because the lender can claim ownership to the borrower’s property if he or she does not pay. Therefore, lenders are usually more willing to lend large sums of money if the borrower’s property can be sold to pay off the loan.

One con of taking out such a loan is the risk of losing one’s property. If the borrower falls ill or faces a career crisis, he or she might fall behind on the loan payments. While lenders are sometimes willing to go without payment for several months during an unforeseen emergency, eventually the borrower will be expected to return to making regular payments. If he or she fails to do so, the lender can attempt to take the borrower’s property.

Another con of collateral loans is that they are only available to people who own property. For the significant percentage of people that rent homes or cars, collateral loans are basically useless because there is no collateral to offer. These people are often forced to seek unsecured loans, which are generally only available to people with a good credit history.

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