Loan Money

Collateral Loans- Pros and Cons

Collateral is a term used to refer about a certain object which is valuable in nature and one which will be able to compensate for the loan amount if the buyer fails to pay off the loan amount. A collateral is actually a security deposit, which is generally a tangible substance, that the lender keeps with himself or herself so that he or she will be able to auctioned or sell out it to get back the loan amount in case of non-repayment of loans. A collateral is demanded by the lender as the lender wants to stay sure about his or her payment. A collateral is essential for almost all types of loans. However; a recent trend has come up in the market, in which lenders are offering collateral free loans so as to attract more borrowers. However; shortcomings are more for these types of loan structures than for any other types. This is the reason why borrowers should always consider opting for collateral loans. However, one thing that is for sure is that loans which demand collateral, also have pros and cons, some of which are discussed below.


Higher security

Collateral loans are undoubtedly more secure and reliable as compared to the loans which are not collateral demanding. The system is also a lot more transparent and the borrowers get to know the fact how the lender will acquire money from them in case they fail to pay off the loan amount. While keeping something valuable as a collateral is definitely a huge mental stress and something that no person would prefer to do, it is still a clearer concept and the borrower knows that he has the responsibility to clear the loan amount or else he or she will be losing out on something valuable. There is no hidden means of losing out money and everything is pretty much clear to the borrower.

Lower interest rates

The second benefit of these loans is that these loans have lower interest rates than unsecured loans, i.E., loans which do not call for collateral. It is because the lender keeps something with himself or herself as a security for the amount that he or she has paid to the borrower, that the rate of interest remains lower. Unlike with insecure loans which have higher interest rates, secure loans have lower interest rates.



One of the one biggest disadvantages of collateral loans is that the borrower is required to keep something as a security against the loan amount that the borrower is borrowing from the lender and the object that is taken as the collateral is something that is of high value, like real estate property, gold jewelry etc. If the borrower by chance fails to pay back the money he borrowed, the lender will then keep the collateral with him or her to suffice up for the loan money.

Difficult to get

Despite the fact that loans demanding for collateral are pretty safe both for the lender and the borrower, secured loans like these are extremely difficult to get. It is inevitable for the borrower to get these loans approved, as they need to have a neat and clean credit rating and the sufficient amount of income so as to repay the loan. Unlike unsecure loans in which the lender rarely sees the income and the credit rating, secure loans are a big hassle to get approved.