Is it a good idea to use collateral against a personal loan?

If you’ve thought about taking out a secured personal loan but aren’t quite sure how this whole collateral system works, you’re not alone. This is one of the most frequently asked questions about personal loans.

We asked Mozo banking expert Peter Marshall and David Norman, COO of online personal lender NOW Finance, for answers to help us explain the pros, cons and key considerations when the use of collateral to secure a loan.

What is a secured personal loan?

A secured personal loan is a type of personal loan that requires the borrower to post an asset as collateral for the loan, also known as collateral. Often these loans come with lower interest rates because secured borrowers are seen as lower risk to a lender by securing an asset against the loan.

The benefits of a secured loan, along with lower interest rates, include access to longer repayment periods and the ability to borrow more money.

David Norman of NOW Finance explains: “Given the presence of an asset as collateral, and therefore the reduced risk of being left behind by a defaulted loan, lenders generally offer lower interest rates to borrowers guaranteed. For the same reasons, higher loan amounts may also be available to secured borrowers.

How are credit scores used when evaluating secured loans?

Mozo’s Peter Marshall said it’s important to remember that while having an asset is good for getting a lower rate, having a healthy credit score is even better.

“Risk-based pricing means that often the best secured personal loan rates are reserved for customers with good credit ratings,” Marshall says. “Clients who have both an asset and an excellent credit score when applying for a loan are favored by lenders because they are the least risky type of borrower.”

According to Norman, “Lenders evaluating applications for secured loans may place less weight on factors such as credit rating/history and income than they would when evaluating an unsecured loan. However, the most responsible lenders will emphasize these factors in any assessment, regardless of the type of loan.

What can be used as collateral on a personal loan?

There are many options when it comes to setting up collateral against a secured personal loan, from your car, your house to the boat in your garage.

“The most common assets used as collateral in a secured personal loan are homes and vehicles. At NOW Finance, we accept applications with a motor vehicle, water vehicle, such as a boat or similar, or a caravan as collateral,” says Norman.

“Each lender will have different criteria for what you can use as collateral against a secured loan. For example, some may specify that secured loans are only available to homeowners, as they will insist that your property is the collateral. .

How do secured personal loans compare?

As for interest rates, the average variable interest rate for Mozo’s Multipurpose Secured Personal Loans database currently sits at 7.21%.

“Over the past few years, there has been some movement in the personal loan interest rate space, with the lowest auto loan rate in the Mozo database now starting at number three,” says Marshall.

But Marshall reminds borrowers that many lenders have adopted the risk-based pricing model, which means lenders offer a range of rates and adjust them based on the customer’s credit history.

The maximum loan amount for secured loans ranges from $50,000 to $100,000 with loan terms of up to 10 years.

For secured loans funded by NOW Finance, “the average loan size ranges between $27,000 and $34,000 and the average loan term is around 5 years,” Norman explains. Secured borrowers also average a credit score between 701 and 733, which puts them in the good to excellent credit rating range.

How does the warranty work?

As mentioned, collateral refers to an asset that serves as collateral against a secured personal loan.

So, what happens to that asset if you can’t repay a secured loan?

If a borrower defaults on the loan (does not repay it), the lender is able to repossess and sell the asset to cover the remaining outstanding balance on the loan.

And sometimes, if selling the asset doesn’t fully recover what you owe, you can still incur additional fees and charges as a result, Norman says.

Like all forms of borrowing, it is important to remember that taking out a secured personal loan involves risk. Before applying, Marshall suggests testing your repayments to make sure you can comfortably repay the amount borrowed without drastically affecting your lifestyle.

Marshall also says to make sure you take every precaution to protect your assets as well.

“If you are securing your loan against a car, it is essential to ensure that this car is fully insured. You don’t want to find yourself in a situation where you’re paying off a loan for a car that you can’t afford to fix in the event of an accident.

What other personal loan options do I have?

If the idea of ​​posting collateral against a personal loan doesn’t sound like the right option for you, an unsecured personal loan is also a solid borrowing choice.

“With an unsecured loan, there’s no need to post collateral against the loan as collateral, so there’s no risk of losing any of your assets,” Marshall says.

“However, consumers are more likely to face higher interest rates by not getting a loan and may have more restrictions on how much or how long you can borrow.”

Still deciding which personal loan option is right for you? Check out these offers below or go to our personal loan center for more providers and even more information!