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Collateral loans are types of loan that
use collateral to secure the loan. But what is meant by
collateral? Collateral means something the borrower
pledge to the lender to secure the loan for the benefit
of the security of the loan and for decreasing the
lender’s risk. Collaterals maybe any type of property,
vehicle, evidence of deposits such as
stocks or bonds. Collaterals serve as
assurance on the part of the lender, that can
serve as back up or payment for the loan
financed in case the loan is not repaid.
To reiterate then, collateral loans simply are kinds of
secured loan that use collateral
as guarantee for the loan. Example, in
availing of housing loan, the borrower may
pledge another house or the same house
being financed as a guarantee for the housing loan. In
case the loan is not repaid at the given term, the
lender may acquire
the pledge collateral as deemed payment
for the loan. Like for another instance, in car loans,
the borrower may use the car being finance as a security
that in case the car
loan is not paid, then the car pledge
would serve as payment for the loan. |
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| It’s actually the same thing as
in housing loan, and with other loans. When the item
pledge is an evidence of deposit, let’s say certificate
of time deposit or stocks, the borrower must agree that
in case the loan would not be paid, whole or part amount
of the deposit or stocks would serve as payment for the
loan.
Collateralized loan on the other hand is almost the same
as collateral loan. It also needs collateral from
borrower as a guarantee for the loan. The difference of
collateralized loan from the collateral loan is that the
former requires additional collateral from a third
party. Meaning, collateralized loan require the borrower
to pledge two collateral, one from the borrower and
another collateral from another person.
Both these loans are beneficial to the lender because of
less risk it gives, since they still have something to
get hold of in cases of default. However collateralized
loans give them more security as to return of payment.
On the part of the borrower, collateral and
collateralized loans are much of hassle. That is why
most of borrowers are hesitant to get collateral loans;
they prefer non-collateral loans even if these loans
have higher interest. Particularly to those who have
nothing to pledge, how they can get loans? Even for
those who have properties to pledge, they are hesitant
because they are afraid that there’s a chance that all
their payments would be meaningless and their properties
lost by default. And of these two, collateralized loan
makes borrowers more inconvenience, as they will need
another person’s assets to serve as another collateral.
But on the brighter side, there are many advantages of
collateral loans to borrowers. Having a collateral as
pledge for loans gives borrowers higher chance of
approval since it is less risky for lenders. Also,
collateral loans have lower interest than that of
non-collateral loans. Another is that collateral loans
promote the habit of being a good payer. By just
thinking that the collaterals they have pledge would be
seized for nonpayment, then they will make sure that
they pay. Collateral loans increase borrowers’ credit
standings.
Non-collateralized loans on the other hand are just
opposite of collateral loans. If the latter requires
collateral, then non-collateral loans does not.
Non-collateral loans are also called as unsecured loans.
Since any collateral does not back up the loan there is
no security on the part of the lender. That is why
non-collateral loans have higher interest than
collateral loans. There is no assurance that the loan
would be paid, there is a low ratio on return of
investment on the part of the lender. In case of
default, the lender has no recourse of getting payment.
Since non-collateral loans are not secured, lenders
carefully examine the borrowers backgrounds, financial
capacities and credit standings. Thus, borrowers have
little chance of getting approved.
Examples of non-collateral loans are credit cards,
personal loans, corporate loans, salary loans,
educational loans, government loans and etc. Credit
cards are the most common type of non-collateral loans.
Because of these conveniences on the part of the
borrower, they tend to get non-collateral loans than
collateral loans. As long as they have the necessary
requirements the lender needs, they can get many loans
as they want to, as their finances could, so long as
they get approved. There are no collateral requirements
that hinder them from availing so.
On the part of the lender, unsecured loans have higher
risk. There are many stories and instances that loans
are not repaid by borrowers. This is true particularly
in countries where credit is thriving. That is why
lenders have to be very strict in investigating the
backgrounds of their borrowers.
On the contrary, many unsecured loan providers are
investing in non-collateral loans, maybe because it
gives them higher rate of return and fast return of
investment.
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