Should I use my Home or Car as Collateral on a Loan?

Should I use my Home or Car as Collateral on a Loan?

If you are looking into getting a loan then you will know that there are many different types and there are some which require collateral. The lender will want you to use your home or perhaps your vehicle as collateral so that if you cannot repay the loan, they will be able to repossess those items and sell them and then make back the money that you owe. This is how a mortgage will always works, perhaps a car and some other types of loans as well. There are advantages and disadvantages of doing this and it is worth thinking them through so that you can decide whether it is the right solution for you.

Advantages of having collateral

If you use collateral for some loans it will mean that you will be able to borrow at a lower cost. The lender will be taking less of a risk as they will know that they will be able to get their money back if they have to. Having a cheaper payday loan with no credit check, will mean that you will not end up paying out so much, it may mean that your repayments are lower or that you repay over a shorter period of time or both. This will means that the loan could be over more quickly, it could more affordable and you will have more money once you are done.

Disadvantages of having collateral

There are problems associated with borrowing with any sort of loan, but there are also some that are specific to ones that require collateral. It is important to think about what might happen if the item you are using, such as your home or vehicle do get repossessed. You will obviously hope that this will not happen, but if it does it could have a huge impact on you. Losing a home could mean moving your family and it could be tricky to find anywhere else to live if you have a poor credit record as a result of not making your repayments or you so not have enough money left to pay a deposit on an alternative place to live.

Losing a vehicle could be just as tricky, if not worse. If you use your vehicle to get to work and there is no other way to get there, then you could find that you will have to give up your job. If you cannot find alternative employment then it could mean that you will lose your source of income and you could end up not being able to afford to stay in the home you are living in.

How to protect yourself

If you do decide to have a loan like this, then there are things that you can do to help to make sure that the worst does not happen.

  • Make sure you can afford the repayments – it may sound really obvious but many people sign up to a loan without properly making sure that they will be able to afford the repayments. Most of us do not know what happens in our household accounts that well, so we might think we will be able to manage but without carefully checking, we will not know for sure. It is therefore worth looking back through checking account statements to see whether it looks like we would have been able to afford it in the past. Consider what expenses you might have coming up and your job security in order to decide whether the loan seems risky in light of how easy it will be for to repay it.
  • Have savings to fall back on– it can be really useful to have some money saved up so that if you do struggle with repayments, there is some money there to help you. If you can have at least a few months repayments available, then if you have some difficulties this could help you out.
  • Consider insurance – some people take out insurance to cover repayments in a loan that they cannot make. This can be useful and reassuring but it is a risk as if you do not use it, you will be paying out extra for nothing. You also need to check under what circumstances the insurance pays out. Some will only pay out in the case of illness, some if you lose your job etc. You need to check carefully and think about what circumstances you want to be insured against and whether there is an insurance that will cover that and if it seems to be a reasonable price. Of course, if you are paying for insurance on top of your loan repayments then you will be paying out more and therefore it could mean that you will be more likely to struggle as you will have less money. It is therefore a bit of a risk either way but some people do find that insurance gives them peace of mind.
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