Many people secure personal loans for purposes of covering home repairs, paying off medical bills, or facilitating a consolidation of loans in Singapore. These personal loans are usually unsecured, which means that you do not need to provide collateral to obtain them, but money lenders sometimes require certain personal loans to be backed by something with monetary value.
Collateral on a secured personal loan can mean an array of things, from a savings account or a car to a home or land. Whether you are a first-time or frequent borrower, it is important for you to understand what collateral on a loan is so that you can secure your funding and prevent your valuable properties from being seized in case of non-payment. Below, we share everything you need to know about loan collaterals.
What exactly is a collateral?
A loan collateral is, in its simplest sense, an asset, such as a vehicle or a house, that a borrower offers to a money lender as a way of qualifying for a specific loan. This collateral can make the money lender feel more comfortable and secure in providing the loan since it serves as a protection of their financial stake in case the borrower is ultimately unable to repay the debt in full.
If the borrower defaults on paying off the loan, the money lender is able to seize the collateral and have it auctioned and sold to help compensate for their financial loss. For instance, if you use your home as collateral for a personal loan, and you end up being unable to pay off the loan, your money lender may take ownership of your home. This means that if you cannot keep up with payments on your secured loan, you may end up losing your collateral.
In essence, when you obtain a secured personal loan, the money lender usually places a lien against your collateral. This lien gives the money lender the right to seize your property if you fail to pay off the loan. However, you may still utilise your collateral while you are repaying the loan. Once you have fully paid the loan, the money lender then removes the lien on your property.
What can be used as a loan collateral?
There are several different kinds of properties you can put up as collateral for a secured loan. However, as a rule, money lenders only accept properties that hold monetary value as collateral. The type of collateral you can use usually depends on the kind of loan that needs securing. Here are some of the most common assets money lenders require as collateral:
- Real estate: Real estate properties are among the most common kinds of assets people use as collateral to secure a loan. If you are getting a mortgage, specifically, the house you are purchasing will be the collateral. If you have already purchased a home, you can make use of your equity to obtain a home equity line of credit or a home equity loan.
- Vehicles: Vehicles are another common asset that money lenders usually accept as collateral on loans. When you purchase a type of vehicle, such as a car, that vehicle will also serve as a security for your loan. Alternatively, you can make use of your car equity to obtain a title loan, but when doing so, it is important for you to be aware of the risks first.
- Investments: Some money lenders also accept investment accounts as collateral, specifically for securities-based loans. This can either be an instalment debt or a revolving line of credit that comes with amounts between 50% to 95% of what you have in store in your brokerage account.
- Cash: In some instances, borrowers may also use their deposit accounts as collateral for a secured loan. This can include your money market account, savings account, or certificate of deposit.
Conclusion
Financial institutions and money lenders usually consider secured loans less risky and, therefore, require certain kinds of loans to be secured by collateral. Understanding what collateral is and what assets you can put up as collateral is important in successfully obtaining a secured loan and in preventing your property from being seized in case you fail to pay off your debt.
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