5 Factors to Consider Before Applying for a Collateral Loan

Isaias Lijauco

Car Collateral Loan Tips

Feb 10, 2020

Secured or collateral loans offer a lot of benefits unavailable in unsecured lending programs. Aside from higher loan amounts and lower interest rates, it can also build up or boost your credit score. Still, getting a collateral loan is a big decision to make, and as with considering other financial facilities, you need to keep certain factors in mind before filing an application.

1. Asset to Pledge

The main reason why collateral loans offer higher loan amounts and lower interest rates is because you must present an asset as security payment to the lending firm or bank. The type of collateral you’ll bring and its condition would determine how much money you’ll get to borrow as well as the number of benefits that would come with it. To maximize the credit, you need to pick the right property.

Assets You Can Use as Collateral

  • Real Estate

Real estate is one of the two most popular assets used as collaterals in secured loans. You can use it to get mortgages, home equity loans, and other lending programs.

  • Vehicle

The other most common collateral used are vehicles. Aside from collateral loans, they’re also used as security payment in car loans (In case you can’t settle your debts, the money lender gets to seize the vehicle you bought with the borrowed money).

  • Savings Account

Several banks also offer certificate or savings-secured loans for existing clients. In other words, they’ll let you borrow money from them while preserving the money you have in your deposit account.

  • Investments

Another asset you can pledge are the stocks and shares you own. Stock- and securities-based loans normally offered by private banks and brokerages operate very much like any other collateral loan programs.

  • Future Paychecks

But in case you don’t have any of the four assets mentioned above, you can always use your future salaries as collateral. In other words, you need to settle the collateral loan using the wages you earn.

2. Current Financial Status

Aside from the asset you need to pledge, the most important factor to consider when applying for secured loans is you. You need to review your present financial situation before going to the money lender.

Steps to Evaluate Your Financial Status

  • Determine Your Net Worth

Knowing your net worth is a good way to see your financial standing. Higher net worth means better financial status, so better focus on increasing it by at least 5% every year.

  • Calculate Your Debt-to-Income Ratio

Determining your debt-to-income ratio is also important when reviewing your financial situation because it helps you ascertain whether or not your debt is manageable as well as gauge your credit score. To enjoy good financial standing, keep the ratio at 20% or below.

  • Evaluate Your Housing Expenses

The quality of the home you live in also affects your financial standing. But contrary to popular belief, living in a premium property doesn’t equate to a good financial situation. In fact, the more expensive your home is, the more your spending you’ll bear. To enjoy better financial status, you need to minimize these housing expenses.

  • Check Your Cash Flow

Find out where your money is going and determine whether or not you’re living above your means. Doing so would not only help you evaluate your financial situation, but also enable you to reduce unnecessary spending. If possible, create a budget plan and stick to it.

3. Credit History

People with pristine credit histories almost always get to enjoy more perks when obtaining collateral loans. To measure your chances of getting approved, you have to fix your credit history before applying.

Tips to Improve Your Credit History

  • Pay Your Bills on Time

Money lenders usually look at how you settle your bills when reviewing your credit history. Thus, you have to pay your bills on time if you want to positively influence your credit score.

  • Minimize Your Credit Balance

Credit utilization ratio is also a factor that affects your credit history. It’s usually calculated by dividing the sum of all your credit balances by your total credit limit. The lower this ratio is the better your credit score will be, so you had best keep it at 30% or under.

  • Avoid Closing Your Unused Credit Cards

Not closing any unused credit cards you have is not only a great financial strategy, but it also helps keep your credit utilization ratio at optimal levels. So keep these extra cards open, especially those that don’t come with annual fees.

4. Interest Rate

Just because some secured loan programs offer low interest rates doesn’t mean they’re better than other facilities. Aside from stretching out the repayment period, the low-interest program might come with hidden charges and obligations. Thus, you need to make sure these rates are as reasonable as they are available.

Ways to Get the Best Secured Loan Interest Rates

  • Compare Different Products

Make a comparison list while shopping around for secured lending programs. That way, you can pick the one with interest rates that will give you the best value. Get recommendations from friends, inquire at your trusted bank or lending firm, and make sure the interest rate and repayment modes suit your needs.

  • Get Pre-Approval

Pre-approval goes like this: you go through the application process and have your loan amount, interest rates, and terms determined. If there are any factors you don’t like, then you simply have to have them adjusted accordingly. Pre-approval is a smart trick that will help you figure out the interest rates and other benefits you’ll get from the secured loan.

5. Loan Term

Collateral loans usually come with longer payment terms than their traditional counterparts, partly because of their lower interest rates. However, some banks and lending firms offer more flexible terms than others. So better ask the money lender if they have such open-ended payment terms.

Why Get Flexible Payment Terms

There are various reasons why you should go for flexible payment terms when applying for a collateral loan. But the most important one is that it allows you to settle your debts sooner.

Conclusion

Collateral loans will help you get all the funding you’ll need as much as any other lending programs. Still, to make sure you maximize it, you need to consider a lot of things (like the ones mentioned above) before making a decision.