You may have heard that you can get a better interest rate or other terms on bad credit loans if you secure them with collateral. However, you may not understand what collateral is or its role in securing a loan. Put simply, collateral is anything of value that the lender can use to get the money that he or she is owed if you miss one or more payments. Lenders will generally accept almost anything of value as long as it can be liquidated relatively easily.
The Asset You Borrow Money to Purchase Can Be the Collateral
If you borrow money to buy a car, the lender will put a lien on the car until the loan is paid off. The only way to get that lien removed ahead of time is to use a personal loan to pay the balance owed on the vehicle or to trade in the car and have the dealer pay off the balance as part of the transaction. Lenders will also name themselves as parties to a lien when you buy a house using traditional bank financing or hard money loans.
Shares of Stock or Shares Of a Financial Institution May Be Used to Secure a Loan
Let’s say that you own 100 shares of stock that have a cumulative value of $500. In some cases, it may be possible to promise those shares to a lender if you cannot repay the loan for any reason. In essence, you have secured one or more loans for bad credit for up to $500 with those shares without having to sell them or otherwise take action to get the cash. Financial institutions may allow you to use the money in your checking or savings account to secure a loan with that institution.
Gold or Other Precious Metals Are Often Acceptable as Collateral
If you have gold bars, silver necklaces or any other type of precious metals in your home or in a safe deposit box, you may be able to use that as a promise to repay a loan. Most people have at least some gold or silver either in pure form, in their jewelry or in a watch that they may wear. Coins that were minted before 1969 may have tangible amounts of silver in them, which makes them worth much more than 10 cents to their owners.
Using collateral to secure a loan can make it much easier to get the rate that you want or deserve when you borrow money. As the lender knows that he or she will see his or her money back in a timely manner, there is less risk, which means you pay a lower interest rate or get other favorable terms.