When Do You Need Loan Guarantees

Collateral is a term for assets offered by a borrower to secure financing. It serves to reduce the risk for the lender, improving one’s chances of being offered better terms and conditions. You may need collateral to make sure your interest remains at a constant level, or to appease a credit committee or an investor. There are different types of collateral you can offer, including stock, equipment, certificates of deposit, letters of credit, cash, and other valuables that you have. Collaterals can take other forms as well, for example, real estate and automobiles. Insurance policies, cash accounts, and investment instruments are also accepted as collateral. Finally, you can use future payments and collectibles to secure the loan.

In general, you need collateral when the creditor requires some assurance that the money loaned out will not be lost. If you commit some asset as a guarantee, the creditor can take it and thus recover the money. Unlike such secured loans, no collateral is required with unsecured ones, meaning that the creditor has no other option that bringing legal action against the borrower or dinging their credit.

Borrowers with poor credit may be required to offer collateral. Loans offered to persons with compromised credit are known under different names such as auto title loans, car title loans, loans for title programs, cash title loans, and motor vehicle equity credit lines. In general, these loans are quite costly and should be avoided if possible.

You will need loan guarantees for real estate purchases. In most cases, homeowners are buying real estate with a mortgage to be held as collateral over the term of the loan. The financial establishment that extends financing will retain interest in the estate until the borrower pays the mortgage in full.

Another case in point where you need loan guarantees is the purchase of a vehicle. Most finance companies will require that the newly bought vehicle serves as collateral to purchase it. The company can take possession if the car owner fails to maintain payments for some reason. It should be noted that most companies will agree to finance only the vehicle’s current market value. In this way, they ensure that the collateral will help recover any losses in case the borrower defaults.

If you plan to apply for a cash loan, you may also need collateral. You can use jewelry or other valuables, which have a certified value. Rare antiquities are accepted by some lenders as well. Depending on your individual circumstances, you can use almost any asset to secure a cash loan, provided that you show it is owned by you. As long as the financial institution is willing to accept the offered valuable as a sufficient guarantee, it can be used as collateral.

If you apply for a payday loan, you will not need to offer loan guarantees. The amount you will be granted depends on your income and employment, history with the particular lender, and any other loans you may have. While your credit score may not be regarded as important, your income is a major factor for the creditor, showing them the likelihood of you being able to pay back the loaned amount. You will be allowed to borrow more money if you are an existing client of the establishment. Finally, if you have payday loans with other providers, you may not be approved for the loan.