How to Get a Collateral Loan

Four Parts:Gathering Your ResourcesComparing LoansClosing Your LoanCanceling Your Loan

A loan in which you leverage your assets is called a collateral or secured loan. Lenders like collateral loans because they know they will still have the collateral if the borrower cannot repay the loan. Since the lender has security, they are more likely to give larger loans with a lower interest rate over a longer period. Collateral loans are an option when you want lower interest rates for a large loan, have poor credit, or are considering cutting debt costs.

Part 1
Gathering Your Resources

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    Figure out the amount of money that you need. Borrowers should avoid taking out excessive collateral loans because they will usually be paying much more money back in the end.
    • Calculate your monthly income, monthly expenses, and your debts. If you’re consolidating your debt, keep in mind that this may not be the best solution because it may cause a higher interest rate, which costs you more. Determine what you can comfortably pay monthly.[1]
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    Determine what you will offer as collateral. There are various assets you can leverage: your home, car, personal savings, or a certificate of deposit. What you offer as collateral will determine the rate of your loan.
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    Know your credit score. The credit score system is designed to inform lenders about you and your credit experiences. Your bill paying information, the number and type of accounts you have, late payments, collection actions, outstanding debt, and how long you have had the accounts are all taken into consideration. Creditors take this information and compare it to the credit performances of people with similar profiles. If you know your credit score, you will have a much clearer idea of what rates and terms to expect in your loan.
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    Ask for recommendations. Ask your friends and family for lenders they trust. Doing so will help you avoid untrustworthy lenders and give you starting place.
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    Shop around with different lenders. Ask various lenders about what kinds of deals you can get on collateral loans based on your assets, credit score, income, and other factors. These vendors can be banks, savings and loans, credit unions, mortgage brokers, and mortgage companies. Find the best loan you qualify for from each lender.[2]
    • Let the lenders know you’re shopping for the best deal. You want them to compete for your business. Ask them to match or beat the terms of the other lenders. [3]
    • Remember that mortgage brokers only arrange loans. They don’t lend money.

Part 2
Comparing Loans

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    Look at the different terms of the loans. Once you have shopped around and talked to various vendors, you want to examine each of their offers. Review each offer carefully and ask people you trust to review the loan offers with you. [4]
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    Look at the annual percentage rate (APR). The APR is the most important factor to compare when taking out a collateral loan. This rate looks at the interest rate, points (with each point equaling a fee to one percent of the loan amount), mortgage broker fees, and any other credit charges you owe the lender and expresses them as a yearly rate. The general consensus is that the lower your APR, the lower the cost of your loan.
    • Ask your lender if the APR is fixed or variable. You want to see if the rate will change. If it does, then ask the creditor how much and how often.
    • When using something like your car title as collateral, you mostly likely will not have an APR as these loans usually last between 30-60 days. [5]
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    Ask about points and fees. Paying your loan off early or refinancing your loan may prevent from getting a refund on these charges. Additionally, paying your loan early may result in you paying more points. Usually, points are paid in cash at closing, but you may be able to finance them.
    • Financing your points will increase the total cost of your loan.
    • Pay close attention to fees. The application or loan processing fee, origination or underwriting fee, lender or funding fee, appraisal fee, document preparation and recording fees, and broker fees may be quoted as points, origination fees, or interest rate add-ons. Extra points and fees will make your loan more expensive to finance. [6]
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    Find the term of the loan. This is how many years you will be making payments on the loan. If you are consolidating other debts such as credit cards or other short-term loans, then you may have to extend those debts for a longer period.
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    Determine your monthly payment. Look at each loan see how much it will cost you monthly. Find out if this charge is fixed or if it will change over time. Find out if you’re paying escrows for taxes and insurance each month. If the escrows are not part of your monthly payment, you will have to pay for those items separately.
    • Escrows are an account watched over by an impartial third party. The main function of the account is to make sure taxes and insurance is paid.
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    Look for balloon payments. Balloon payments are a large payment usually due at the end of the loan. This payment often occurs after a series of low monthly payments. If you cannot pay the balloon payment when it is due, then you may need to look for another loan.
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    Check for any prepayment penalties. The lender might charge extra fees if you decide to pay your loan off early. These fees can force you to take a high rate loan by making your existing loan too expensive to afford. Find out what you would have to pay to get out of the loan early. Ask the lender if they offer a loan without prepayment penalties.
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    See what happens when you default. If miss a payment or pay late, then your interest rate may increase. Negotiate this provision out of your loan if you can.
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    Determine if the loans include credit insurance charges. If the loan does include credit insurance charges, ask if they are financed as part of the loan. If they are included, you’ll have to pay extra interest and points, which will increase the cost of your loan.
    • See if the credit insurance covers the length of the loan and the full loan amount.
    • Before buying credit insurance, decide if you really need it. If you need the insurance, compare insurance providers to get the best rates.

Part 3
Closing Your Loan

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    Negotiate the terms of your loan. Don’t be afraid to ask the lender to change unfavorable conditions of your loan. Doing so could lower your APR, take out unwanted charges, and remove loan terms.[7]
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    Obtain blank copies of any form(s) you will sign at closing. Creditors do not have to give you a blank copy, but most honest creditors will. Review the forms with someone you trust. If you do not understand any of the terms, review them with your creditor.
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    See if the creditor will give you copies of the actual forms you will have to sign. While the creditor doesn’t have to give you any copies, it doesn’t hurt to ask. Review the forms with someone you trust.
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    Decide if you can afford the loan. Make sure you have enough income to afford the monthly payments along with your normal bills and expenses. If you cannot afford the loan, you are putting your collateral at risk. For example, if you used your house as collateral, then it could be at risk for foreclosure or forced sale if cannot repay the loan.
    • If you are refinancing the original mortgage on your home, ask about escrow services. If your loan includes escrow services, be sure to budget for those amounts as well.
    • If you are using a vehicle as collateral, there may need to be changes made to the title of the vehicle. The lender will put a lien on a vehicle that shows that they have some claim to its value if the loan is not repaid.
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    Ask if the terms have changed. Do not sign the loan if the terms are different from what you thought they were. For example, a creditor should not increase your APR at closing. Negotiate with the creditor if they are different. Be prepared to walk away from the loan if they creditor doesn’t agree to your terms.
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    Get a copy of every document you sign. You may need to review information about your loan, rights, and obligations.
    • Do not initial or sign for voluntary credit insurance unless you decided you wanted it. Do not feel pressured or obligated to sign or initial anything.

Part 4
Canceling Your Loan

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    Cancel your loan within three days. Under federal law, you have three days to reconsider a signed credit agreement and cancel the loan without penalty. This only applies if you are using your principal residence as collateral.
    • You have until midnight of the third day.
    • The first day beings after you sign the contract, receive a Truth in Lending disclosure describing your loan, and get a Truth in Lending notice explaining your right to cancel.[8]
    • Be aware that business days include Saturday when canceling a loan. They do not include Sunday or legal public holidays.
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    Notify the lender in the writing. You cannot cancel through phone or through conversation. Your notice must be mailed, filed electronically, or delivered before midnight of the third business day.[9]
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    Ensure that your money is returned to you. The creditor must return all money and property you paid as part of the credit transaction within twenty days. If you received money or property from the lender, you are allowed to keep it until the lender proves that your home is no longer being used as collateral and returns any money you’ve paid. If the lender does not claim money or property within 20 days, you can keep it. [10]
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    Know that any activity related to the contract cannot take place. The creditor may not give you the loan money. Any other party, such as a home contractor, may not deliver any materials or start work if home improvements were part of loan.
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    Contact the authorities. If you feel that a lender has violated the law, you can contact the lender or agency and voice your feelings. You can also contact your attorney, the State Attorney's office, a banking regulatory agency, or the Federal Trade Commission (FTC).


  • Never take a collateral loan without understanding all of the liabilities. Government groups like the Federal Trade Commission maintain guidelines for consumers to help them work through the advantages and disadvantages of a collateral loan.
  • Look for signs that you’re dealing with untrustworthy creditor. You do not want take out a loan you cannot payback using collateral. If you do, then you will have to forfeit your collateral. Dishonest creditors target older people, low-income people, or people with bad credit.
  • Avoid any creditor who tells you to lie on the loan application. For example, stay away from a lender who tells you to say that your income is higher than it is.[11]
  • Stay away from any lender who tries to pressure you into applying for more money than you need or tries to pressure you into accepting monthly payments you can't comfortably make.
  • Avoid a lender who doesn’t give you required loan disclosures or tells you not to read them.
  • Avoid a lender who promises one set of terms when you apply, and gives you another set of terms to sign without giving a legitimate explanation for the change.
  • Do not trust a lender who tells you to sign blank forms and promises they'll fill in the blanks later.

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Categories: Mortgages and Loans