If you don’t have good credit, you’re part of a much bigger group than you think. In a State of Credit report done by Experian the nation’s average credit score is around 680. If you keep track of your credit score you know 680 is good, but it’s not great. The credit score is enough for some personal loans and not high enough for others.
If your credit score is lower than the national average of 680, you may run into higher interest rates, denied credit applications, and more negative impacts when you try to borrow money. But do you know what can be used as collateral for a personal loan? The things that can be used as collateral for a personal loan can make the difference between being approved or denied credit.
Read on to learn more information about what can be used as collateral for a bad credit personal loan. No one wants to pay exorbitant interest rates for a personal loan or be denied for a loan that you really need. The below shares information on ways you can work around to get a personal loan.
What Can Be Used As Collateral For a Personal Loan?
The majority of us don’t have enough in our checking or savings account to take care of life’s emergencies or events. When an event or emergency happens, you need access to more money. It’s what you do next and how you do it that makes a difference in your loan terms and interest rate.
When you want to use collateral for a personal loan, it’s defined as a loan being secured or unsecured. A secured loan is backed by one of your assets, which is used as collateral. The asset can be your home, your car, and other things.
An unsecured loan isn’t back by an asset; therefore, the loan has no collateral behind it. The most common collateral items used for a personal loan are:
- Any personal real estate you own
- Your home
- Your car
- Any paychecks you receive through your job
- Any cash or investment accounts
- Certificate of Deposit
- Any art collection, jewelry or collectibles you own
It’s by putting up collateral you can get a loan with far more reasonable rates and terms. More than that, collateral can help you qualify for a personal loan when you have bad credit.
How Do Collateral Loans Work?
Collateral loans work through a guarantee system. The lender is protected from risk in collateral loans. Whatever you own that was used to secure the collateral loan, the lender can take if you default paying the loan back. A major benefit of a collateral loan is it has better rates than payday loans so paying back the loan has fair repayment amounts.
A collateral loan is also known as a flexible financial product. It is your collateral that matches the value of your no credit checks personal loan. You have to remember as long as you don’t miss any of your repayments your loan company has no reason to initiate the process of taking your collateral asset.
Flexible Financial Product
A flexible financial product allows you to use the funds for anything you need to use the funds for, like a medical bill or house repairs, etc. While collateral means the same thing lender to lender, not all secured loans are the same. Even with your collateral in hand, different lenders offer different terms to any personal loan borrower.
A collateral loan also allows you to qualify for a larger loan than a normal quick loan. After all, you’re reducing the lender’s risk by offering up your collateral asset. It stands to reason you can borrow more money for a personal loan than you would without the collateral.
Research is vital when you’re reviewing the lenders who will use your collateral at a low-interest rate and who has reasonable terms for your payback schedule.
What are Unsecured Loan Drawbacks?
When you’re deciding between an unsecured or secured personal loan, you need to know there are clear drawbacks to unsecured loans you may not be able to get around. Unsecured personal loans often come with higher interest rates. This is especially true if you have a bad credit score.
Unsecured personal loans can be difficult to qualify for if you have a bad credit score. Many times you won’t be able to qualify for a personal loan no matter how much you need the loan and no matter what you need the loan for. You want to research and consider the type of loan you’re thinking about getting before you apply anywhere.
What’s Your Collateral Worth?
Finding out how much your collateral is worth depends on the type of collateral you are offering for a personal loan to be secured. If you’re offering the amount of money in your savings account to secure a personal loan your collateral is worth the dollar amount you have in your savings account. It’s a pretty straight-forward collateral equation.
But, if you’re offering a piece of artwork, your home, or something like a piece of jewelry that’s a bit more involved when determining your collateral worth. When you have collateral that needs to be evaluated for worth, most of the time the Loan to Value Ratio (LTV) is applied.
Loan to Value Ratio (LTV)
Loan to value ratio (LTV) is when a lender quotes you an acceptable loan based on a value ratio for your collateral asset. An example, maybe your car is worth $20,000, and the loan using your car as collateral can be about 80% of the car’s value. So your personal loan is for $16,000.
Some lenders will offer you only 50% of your collateral asset, which is why it’s important to do your research and find the lender who offers you the best rate and terms for your personal loan. It’s important to remember you are coming into this loan with bad credit, but by getting the loan you’ve come up with a way that helps you improve your overall credit score.
Personal Loans Using Collateral Advantages
You have bad credit, and you’re getting a personal loan by using collateral. Besides the lower interest rates and the possible greater loan amount you can receive, what are some other advantages you get? Some other advantages are:
- You have greater flexibility in your loan terms and repayment schedule
- You can use the personal loan for whatever purpose you need it for
- You can usually get the loan approved in as little as a day or two
- Some personal loans can be done online while you’re at home
- When you make regular repayments that are on time you help build up your credit score
What even better is early repayment is usually not penalized. Personal loans have changed with the times and now meet the needs of the consumer with no credit or bad credit. In some cases, personal loans are used by people with good credit that need access to a specific amount of money for an event, activity or emergency.
How Is Bad Credit Helped by a Personal Loan?
When you’re using a personal loan to pay down a credit card, your credit score improves almost immediately. Credit scores are, in part, based on credit utilization. Credit utilization is the percentage of the credit you have out there that’s active and in use.
Since personal loans don’t involve a credit line, you are technically transferring debt from a revolving credit card debt to a personal loan. That transferring of debt lowers your credit utilization amount which has a positive impact on your credit score. One of the major benefits of personal loans is they can help you pay off your credit card debt without using a debt consolidation firm.
By not having to use a debt consolidation firm, you save money. Something to remember is if your credit score is below 580 it’s probable your going to need collateral to secure your loan.
Difference Between Credit Card Loan and Personal Loans?
Some people who think instead of going to all the trouble of getting an online loan, just get your credit card limit raised and use your credit card. That’s typically bad advice. First its bad advice because a credit card limit raise or loan is only for specific cards so you can approach only the card issuer for it.
A personal loan allows you to approach any lender with the lowest rate and terms beneficial to you. Also, your credit score is low enough already so you don’t want to do anything like borrow against a credit card or get a raised limit knowing you can’t possibly pay it back. By not paying the credit card balance owed each month, your credit score can drop even lower than it is now.
Collateral for a Personal Loan Makes Sense
Sometimes what can be used as collateral for a personal installment loan makes sense for you. It helps you improve your credit score. It allows you to use the loan money for what you need it most. It has low-interest rates and reasonable terms.
Bonsai Finance helps make this happen with you with their unique no credit check personal loan service. Bonsai Finance flexible financial product is all about the customer and their needs. Reach out to Bonsai Finance today so we can help start you on the road to an improved credit score.
You never know what flexible finance products can make a brighter future for you!