Borrowing money without collateral and guarantor is possible since online lending introduced. As long as you have affordability to pay off your debt, a lender will never ask you to secure the loan provided the duration is short. Things become convoluted when you have a bad credit rating and poor financial condition into the bargain.
If a lender is ready to lend you money despite impaired credit standing, it does not mean that the chances of rejection of your application are not high. A lender will always want the money back at the end of the term and hence they evaluate your income statement. If they doubt that you cannot pay off, they will turn down your application.
Short-term loans are advertised as 100% guaranteed loans from the Honor Finance. It means you will get money the same day you put in the application form if you can afford to repay it, but what if your affordability is poor? Getting a loan signed off on requires you to have a good credit rating and affordability. If a lender is not certain about your repayment potential, you may need to secure it. This generates an intriguing question which asset you should use as collateral to borrow money.
With Collateral, you can borrow a large amount of money, and it improves the chances of having a loan approved. Collateral abates the risk of a lender, which means you are likely to borrow money at affordable interest rates.
Types of assets you can use as collateral
Collateral is any asset that you pledge against a loan. When you secure a loan against an asset, your lender obtains the title of the asset. You can use it as long as you smoothly pay back your loan. If you stop making payments, the lender will liquidate your asset to acquire cash. You must remember that the value of your collateral will be higher than the amount you borrow. Some common forms of collateral include but not limited to:
- Real estate
- Machinery and equipment
- Cash accounts
- Bills receivables
Though you have a variety of options, lenders usually seek for automobiles, equipment and (real estate in case of long-term loans).
What if you secure your loan with an automobile?
Here are the pros and cons of securing a loan with an automobile.
- You will get money at lower interest rates despite bad credit rating. The shorter the length of the loan, the better the interest rates.
- You will pay money in equal instalments and hence they are easily manageable.
- An automobile is a depreciating asset. With each passing day, the value will keep declining and hence there is no guarantee that the lender will recover money by liquidating it in case you permanently fail to pay off.
What if you secure your loan with equipment?
Here are the pros and cons of securing a loan with equipment.
- You can borrow money to buy, repair and lease the equipment.
- You do not need to pledge additional security.
- It can improve the bottom line of your business.
- Equipment loans can be used for only equipment. You cannot use them for any other expense such as payroll.
- Equipment financing can be an expensive option.
What if you secure your loan with bills receivables?
Here are the pros and cons of securing a loan with bills receivables.
- It is a type of unsecured financing because it does not require any physical assets.
- You retain the ownership of your business.
- Accounts receivable financing can be expensive because failure will only increase your debt.
The bottom line
Before you secure your loan, you must evaluate pros and cons. Sometimes a secured loan seems a cheaper option because of lower interest rates, but it can cost you a small fortune if you fail to pay back the debt.