You may be looking for a personal loan to get you through a tough spot. Maybe payday is a little too far away and you don’t have enough to see you through the month.
Perhaps you’ve had an unexpected bill that you must pay, and simply don’t have the means on your own to pay it.
If this is the case, you may be turning your head to a personal loan.
A personal loan is normally unsecured – which in simpler terms means it does not require collateral, something to secure the loan against.
But, some lenders will only offer their loans when collateral is part of the deal.
Collateral which will mean the loan is secured against something, will often be things like a house, a car or even your savings accounts.
In this guide, we will define collateral for most lenders along with some handy tips on getting a payday loan.
What Exactly Is A Payday Loan?
A payday loan is a type of personal loan that is offered to prospective borrowers. It is normally a very short term loan that is typically paid in full on the day of your income.
Payday loans, due to their convenience, will normally have a very high interest rate when compared to other personal loans, such as an installment loan.
Other differences that a payday loan has compared to an installment loan is that installment loans, as the name suggests, will offer repayments over a number of months or years – as opposed to one payment in a matter of days or weeks.
People may opt for a payday loan if they’re only looking to borrow a very small amount of money, often to cover the cost of an unforeseen bill or emergency.
Most lenders will only offer personal loans with a minimum amount of between $1,500 or $2000 – and sometimes more.
It does not make financial sense for some people to accept a loan for larger amounts of money when they may only need a couple of hundred dollars, and as such will attempt to avoid debt as much as possible.
Additionally, payday loans are usually easier to obtain as opposed to an installment loan.
Due to their high interest rate and often further requirements such as a co-signatory or collateral, payday lenders will accept a much larger pool of prospective borrowers, whereas banks and other lenders will require much stricter criteria.
What Is Collateral?
Collateral is just an asset that a financial institution might request when a prospective borrower requests a loan.
The most common type of collateral for a secured loan is a property, which means that failure to meet the repayment requirements will result in you losing your home to that lender.
This is normally a method to protect the lender from prospective borrowers receiving the money and not paying it back.
This can make the lender feel much better about lending large sums of money, and this is no more poignant than when it comes to somebody with a low or poor credit score.
Credit scores are our way to indicate to people like lenders and landlords that we can be trusted to utilize credit and manage repayments responsibly.
If our credit score is low or poor, this might indicate to a prospective lender that we are not trustworthy with using credit (which is, in effect, borrowing money).
As a result, the lender might feel apprehensive over lending to you. Therefore, they will request some sort of guarantee that they will get something back – should you fail to meet the repayments.
This procedure is when a lender puts a lien against your collateral.
This gives them the right to claim ownership of whatever the collateral is, in the event that the loan is not repaid as per the credit agreement.
However, if the borrower does pay back the loan under the agreement terms – the lien is removed from the collateral.
The difference between a secured loan (a loan with collateral) and an unsecured loan, is that if you fail to make repayments – you would not be in danger of losing things like your home.
At least, not yet. It would still be possible if you fell into huge debt and went bankrupt.
What Might Be Considered As Collateral?
As we said, typically, collateral would be your home. However, lenders may ask for something else if you are not a homeowner.
These can include such things as:
- Savings accounts’ money
- Money in a CD account
- A vehicle (including cars, boats, planes)
- Stocks and bonds
- High value art
- High value jewelry
- Future income
- Precious metals
- A cosignatory**
** A cosignatory might have been requested in a secured loan, but this will move the responsibility of debt onto them in the event that you do not meet the repayment requirements. A cosignatory is almost always a homeowner, and their property is typically the collateral.
All of the listed items above can be requested by the lender as collateral but they can also be used by the courts to make repayments if you are in debt to somebody and they have won a judgment against you.
What Are The Pros And Cons Of Getting A Secured Loan?
As with all borrowing options, secured loans have their own pros and cons which must be considered before getting into a credit agreement.
We will begin by looking at the pros of accepting a loan agreement that requests collateral.
- Using collateral for a loan will give you many more options when looking for a payday loan. This could mean a lower interest rate or a group of prospective lenders that will have to offer more competitive rates to get your business.
- Payday lenders might offer you larger sums of money if you put up something as collateral.
- It’s possible that secured loans can improve your credit rating, assuming you meet the repayments.
- The most obvious is the risk of losing something like your home or an item that you might have sentimental value from. Sometimes, it’s not worth the risk – particularly if you’re not great at committing to repayments.
- Failure to meet repayments can involve debt collectors, local law enforcement and other entities coming to your property and making your life stressful. It may also result in court appearances.
- Other lenders might see your choice of a secured loan as a desperate “grab” for money and might refuse to lend to you in the future. Additionally, if you fail to repay the lender – they will almost certainly refuse you in the future.
- You run the risk of bankruptcy, homelessness and other financial problems which will stay with you for decades.
Payday loans can be extremely helpful but there are always risks when it comes to taking out a credit agreement. Before you accept the terms, ensure you’ve understood everything.
This will include the amount, the interest rate, what the collateral is, the date of repayment and what the consequences could be for failed repayments.
It is always a good idea to speak with an independent adviser before accepting any loan agreements.
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