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Collateral Loans

Guest post by: Kristin Thayer

Article Overview: Collateral Loans, what are they? A collateral loan is simply borrowing money, while pledging something that you already own as collateral.

Collateral Loans

What this means is you borrow money but you have to give something in return for that money until the money is paid back.

Do you literally give the collateral away?

No. Let's say you have been an independent dump truck driver for the past 5 years and you are ready to purchase another dump truck to expand your business. You own your truck because you only took out a loan for 4 years.

Your dump truck is valued at $50,000 and you are willing to use the truck as the collateral. The finance company will place a lien on your dump truck, lend you the money for the new dump truck that you are buying and will release that lien only after you have paid the loan back.

This type of Small Business Financing is actually quite easy to be approved for if your collateral qualifies and holds enough value for the dollar amount that you need.

What can be used to qualify for this type of loan?

Typically the finance companies are going to look for good, hard collateral such as construction equipment, heavy duty vehicles, etc.

If you happen to default on the loan, it will be much easier for the finance company to sell your old and new dump trucks (yes they get both if you don't pay them back) to someone else than it will be to sell a commercial freezer (not good collateral for a collateral loan because it doesn't hold a high re-sale value).

If collateral loans can be easier to get approved for than traditional Small Business Financing, why isn't everyone doing it? That's an easy answer. They typically come with much higher rates!

Collateral loans are typically used by people who have less than desirable Fico Scores, which is why the finance companies ask for the security of using the additional collateral. If you do not pay back the loan, the finance company will take the equipment that you purchased, as well as the collateral that you pledged to get the loan.

How much will the finance company give you based on the above scenario of a $50,000 dump truck and how long do you have to re-pay the loan?

Well, it really depends on the finance company and the over-all current value of the truck. You can get anywhere from up to 50% of the current value, all the way up to 100% of it's current value.

Finance companies will generally go out to 5 years but keep in mind, the longer term you take, the more you will probably pay.

The reason you may pay more is because it's taking longer for the finance company to get their money back, while the value of the collateral is going down. We recommend taking the shortest term that you feel comfortable with.

A couple of questions you may want to ask yourself are will you make enough money to pay your monthly payment and put money in your pocket at the end of the day?

And, do you feel it is necessary to make this purchase now even though the rates and terms may be less than desirable?

Only you know if now is the time for whatever the loan will be used for so if you feel confident and are willing to put up your collateral in order to do what you need to do, what are you waiting for?

Sometimes business opportunities come when you are not expecting them and if you have no other way of jumping on whatever this train may be, you may just have to pay the higher price with a Collateral Loan.

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Article Tags: borrowing money, collateral loan, collateral loans



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