Are you going to be applying for a relatively large business or personal loan sometime soon? If you are, you might be asked to provide collateral for it.
What is collateral? Well, it’s essentially an asset you agree to put up as security for a loan. If you aren’t able to repay a loan for one reason or another, a lender will often keep the asset that you used as collateral so that they don’t lose money on the deal.
There are many forms of collateral that you can use to secure a business or personal loan. If you recently asked a lender, “Do I need collateral to take out a loan?”, and then said “yes,” you should decide which type of collateral would work best for you.
Here are seven types of collateral for loans that you can use for a business or personal loan.
1. Real Estate
If you own a piece of real estate, this is usually the best form of collateral that you’re going to be able to find. It’s more often than not the most expensive asset that you have, so it should make it possible for you to secure a business or personal loan without any issues.
You should, however, make sure that you’re going to be able to repay a business or personal loan prior to putting up a piece of real estate as collateral. If you default on a loan, you could very well end up losing your home, business, or another piece of real estate that you’ve put on the line.
If you don’t feel comfortable using a piece of real estate as collateral when taking out a business or personal loan, using your car as collateral for your loan is another great option that you’re going to have. Vehicles aren’t quite as expensive as real estate, but they’re still great assets that can be used as collateral.
The amount of money that you’ll be able to borrow when using a car as collateral will depend on the age of your car, the make and model of it, and its condition. The mileage that you’ve put on your car will also be taken into account.
But the good news is that you won’t typically be subjected to a credit check when you use a vehicle as collateral. You’ll also be able to get your hands on the cash that you need fast.
Those who run businesses often have a whole host of equipment that they use to provide products and/or services to their customers. If your business falls into this category, this equipment could come in handy when you’re on the hunt for collateral for a loan.
You might be able to leverage this equipment to qualify for a loan through certain lenders. The amount of money that you’ll be able to borrow will be based on the kind of equipment that you have and its value at the time that you go to take out a loan.
Does your business always have a lot of inventory hanging around for your customers? If you do, it’s obviously going to be worth a decent amount of money—and that means that it can be used as collateral if you would like.
Using inventory as collateral can be a bit more complicated than using something like real estate or equipment since it can be difficult to calculate what it’s going to be worth to a lender. But it definitely wouldn’t hurt to try to use inventory as collateral if that’s what you want to do.
Do you have a personal portfolio that is filled with stock, bonds, and other types of investments? Or has your business made investments that you’re hoping will pay off for your company in the future?
Either way, you may be able to use the investments that you’ve made to your advantage. These investments might be considered collateral by many lenders.
This is another instance in which you’ll want to be careful when it comes to repaying a loan, though. The last thing that you want to do is default on it and have a lender take your hard-earned investments from you since you used them as collateral.
Many businesses have outstanding invoices that they’re waiting on payments for. If your business has some of these invoices hanging over your head, they might actually be seen as an asset to a lender.
A lender might agree to take these outstanding invoices from you as a form of collateral. They’ll be able to chase down those who owe you money and get their hands on it if you give them access to these invoices. They will, in return, provide you with the money that you need for your business.
You might be wondering, “Why would I take out a loan in the first place if I have cash on hand?” But there are actually a lot of people who would prefer to leave any cash that they have in savings alone and take out personal or business loans rather than using it.
If you do this, you can use that cash to your benefit by putting it up as collateral. It’s one of the best possible forms of collateral for loans.
Choose the Right Type of Collateral When Securing a Business or Personal Loan
In a perfect world, a lender would provide you with a personal or business loan without asking you for any collateral. But if you’re asking them to give you a large amount of money, there is a decent chance that they’re going to want you to put up something as collateral.
You should consider the various types of collateral and select the one that’s your best option. It might end up being the difference between getting and not getting a loan from a lender.
Look for more loan-related tips and tricks by checking out the other financial articles posted on our blog.