Collateral is security, a valuable item that you put down against your loan. It entitles the right to a lender to liquidate it in case you fail or refuse to meet payment obligations. Loans are of two types: secured and unsecured. Unsecured loans are personal loans that allow you to borrow a small amount of money. These loans are discharged in fell one swoop if the loan amount is not beyond £1,000 and over an extended period of time when the borrowed sum is quite large. The repayment term for large personal loans is between 12 months and five years. However, when the loan amount is to be settled over a period of more than five years, it becomes a long-term loan, called a secured loan.
Personal loans cannot be secured loans, and therefore, the repayment term of these loans is hardly more than 18 months. In some cases, it could go up to two years. Even if you are to take out small loans in Ireland for people with bad credit, you do not need to secure it against collateral. Bad credit loans usually come with a small amount of money. No lender would be disposed to lend you a large sum of money with a bad credit rating. However, it does not mean that you do not need to secure a large loan just because your credit rating is stellar.
The role of collateral
When your credit score is not up to snuff, your lender will restrict the amount, and yet they will require you to put down high-worth collateral. If your credit score is good, you will be able to borrow a large amount of money. This blog discusses the role of collateral while borrowing money:
It increases your chances of approval
Collateral is generally required when you have to borrow a large sum of money. Your credit score and income sources will be perused to ensure that you are not borrowing more than your affordability. Lenders would require you to secure your loan against a valuable property such as your house to mitigate their risk.
Although they carefully examine your repaying capacity and past payment comportment, it cannot guarantee that your financial condition will remain good down the road too. What if your financial situation is turned upside down? You might lose your job and find it hard to adhere to payments. Missed payments will add interest penalties and late payment fees. The risk is too high when a loan is to be paid down in a long period of time. Therefore, lenders require collateral.
With the help of collateral, the risk on the part of lenders whittles down. They have the right to repossess the secured asset and liquidate it to cover their money back. Even if your credit score is bad, it increases your possibility of borrowing money.
Interest rates will be lower
Long-term loans are secured loans, so getting them approved without collateral is out of the question. In order to qualify for long-term loans at lower interest rates, you will need a good credit rating and strong repaying capacity. If your credit rating is not so stellar and income sources are not strong., your chances of being approved are slim.
However, your bad credit rating cannot get in your way if you are borrowing a small amount of money. For instance, if you want to apply for legit loans for bad credit in Ireland and your credit rating is bad, you should consider putting down collateral. It depends on your lender’s scheme what size of collateral they would require you. By arranging collateral, you reduce the lender’s risk. They can liquidate it to cover their money back if you fail to discharge your obligation, and they give approval. Interest rates for personal loans with bad credit scores would be quite high, but if you try to secure it against collateral, you would be able to qualify for lower interest rates.
High approval rate
Another benefit of putting down collateral while borrowing money is that you would be able to get approved for a loan easily. Short-term loans are not approbated when your credit score is not so good, but when you put down collateral, you increase your chances of approval. You do not necessarily have to arrange collateral because you can consider arranging a guarantor with a good credit history.
Unfortunately, it is not a cinch to find someone with a good credit rating who is willing to act as a guarantor. Most of the people fight shy of acting like a guarantor as they know that they would also lose their credit points in case they make a default. In order to protect their credit rating, they do not consent to enter into a loan agreement with you. There is unnecessary delay in competing the loan process, but collateral not only increases approval rate but also increases the approval process.
How to avoid losing collateral
Bear in mind that if you fail to repay your debt, your lender will take the collateral into their possession. You will lose your security due to missed payments or late payments.
Assess how much you can afford. You should not borrow more than your repaying capacity. Use the online loan calculator to find out the estimated cost. Actual costs are always higher than estimated costs.
Understand repayment terms. You should carefully ensure that the impact of long and short repayment terms.
Stash away some money for a rainy day. In case you lose your job or are caught unawares by financial setbacks, you should be able to cover your expenses, including debt payments, from an emergency cushion.
Just because you can borrow money despite a bad credit rating, it does not mean you should not intend to borrow money.
To wrap up
Collateral for loans improves your chances of borrowing money. You can easily get approval and qualify for lower interest rates. You can lose collateral if you fail to discharge the debt, so try to borrow money as per your affordability.
