When Should You Post Collateral for a Bad Credit Loan?
Bad credit personal loans sometimes require collateral to secure the funds. When borrowing with collateral, you’re agreeing to give the lender something of value that they can turn around and sell to recover the money that they lent if you don’t keep up your end of the lending agreement by paying it back. So, when should you post collateral for online loans for bad credit? You may want to consider it if doing so decreases your interest rate or gives you access to the funds that you need for an urgent financial situation.
When is it Wise to Put Up Collateral for a Loan with Bad Credit?
When you put up collateral for a loan with bad credit, you’ll have a better chance of gaining approval. Basically, collateral decreases lending risks for lenders, making them more willing to give you the funds that you need.
It’s also wise to use collateral if doing so decreases the amount of interest that you’ll pay for the funds. Lower interest rates make it easier for you to repay the loan. A lower rate means that you’ll pay less overall for the loan.
Finder reports that using collateral gives borrowers more room to negotiate. Since offering this protection to the lender increases your chances of approval and is more likely to come with lower annual rates as well as longer repayment terms, you may be able to obtain terms that work better for your budget.
Decreasing the amount of time that you have to repay a loan is likely to lower the total cost of borrowing the funds while extending the terms generally means that you’ll have smaller monthly payments.
What are the Types of Collateral that People Use?
With collateral, what it comes down to is whether your lender accepts it and if it’s permitted by the law. Lenders generally accept assets that they can easily value and convert into cash. This includes assets like vehicles, cash accounts, real estate and insurance policies along with valuables like collectibles. Keep in mind that in most cases, retirement accounts, such as IRAs, are generally not something that you can use as collateral.
So, What is the Downside of Secured Loans for Those with Bad Credit?
Repossession is a major downside to using collateral to secure loans for people with bad credit. If you default for any reason, you could end up losing a valuable ring that was passed down to you from your great grandmother. You could even lose your car or your home if you use them as collateral to get a loan.
No one intends to default on a debt but life happens, and it often happens in the form of an unexpected financial burden. If you lose the collateral that you put up for a loan, it’s likely to make a bad situation worse.
When securing small loans for bad credit, the lender may give you a little more financial leeway. While this may offer some spending breathing room, it can also be dangerous. If you borrow more than you need, you’ll pay more interest to the lender.
Collateral may also result in approval for a loan with a longer payoff term. This is a feature that may seem like a good thing initially, which is especially the case if you want to decrease your monthly payments. But, longer terms generally mean that you’ll pay more in interest during the life of the loan. The higher loan cost in the end may not be worth the additional financial wiggle room each month.
Be Sure to Avoid Shady Lenders, the Ones Who May Be After Your Home
The Federal Trade Commission offers some good advice about ways to avoid shady lenders. For instance, the agency’s site advises borrowers to stay away from lenders who suggest that you lie by claiming you have a higher income than you do. Also, don’t sign up with a lender who pushes you to apply for more money than you need.
You should also avoid a lender who doesn’t provide the proper loan disclosures or tells you that you don’t need to read them. Along with this, don’t agree to a loan with a lender who presented one set of terms when you were shopping for a loan and another set when it comes time to sign the agreement. It’s also a bad sign when a lender refuses to give you copy of your loan agreement.
Post Collateral When it Makes Sense to Do So
When should you post collateral for small loans for bad credit? You should only consider this option when you know without a shred of doubt that you can repay the loan in full and on time. In addition, you should only enter into this kind of financial agreement when it’s the most beneficial loan product for you.